Common man woes as repo rate goes up

Repo rate and the bank borrower

RBI accommodation policy ran like a test match and was overrun by at least two quarters. But the policy rate runs like a T20 match, when it comes to tightening, with only power play in action. In just over 2 quarters, the repo rate went up from 4 to 6.25% (56% growth in 7 months)😊

Economists and experts are busy in analyzing RBI repo rate. The bank borrower, listens carefully, applauds and is convinced that what RBI does is right. He comes home and it dawns on him that he need to fill his packet more to pay higher interest to tame country's inflation!

An example, how the increase in the repo rate affects the borrower in reality.

Example: Home loan of Rs.30 lacs. 

In May 22, interest rate was 7%., 

Repayment period was fixed at 20 years

Repayment Obligation: EMI Rs.23,259

Interest component works out to 75% of EMI

Total Repayment Rs.55.82 lacs. 

Interest to be paid for the full period of 20 years: Rs.25.82 lacs

In December 22, interest rate is, now, at 9.25%. 

(2.25% increase in home loan linked to repo rate)

Repayment period remains at 20 years

Revised EMI is  Rs.27476

Interest component in the initial period becomes 84% of EMI

Total Repayment Rs.65.94 lacs. 

Total interest to be paid for full period of 20 years Rs.35.94 lacs

Impact/Effect:

The increase in EMI in six months is Rs. 4219 (increase of 18%)

Total interest for the full period goes up by Rs.10.12 lacs (increase of 40%)

If the borrower is unable to pay the additional EMI, the repayment period will be go up by at least another 5 years (25% over the original repayment period). Additional interest on interest due to increase in repayment period, not small, will be an added load*. 

Some of you reading the above may become mad in seeing the statistical figures. But please take comfort that your madness will be much less than the borrower, who suffers the increase in prices due to inflation, is also asked to bear additional cost to tame that inflation. There is a wise saying "Strange indeed are the ways of life!". And the bank borrower agrees to the saying than anyone else!

God bless!

Regards 

V. Viswanathan 

7th December 2022.

*(If he undertakes this, the stress portfolio in banks may not go up as the agreed EMI do not change. Here also, the customer helps the bank to keep a standard asset portfolio, by paying interest on interest)

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