Dec. 31: The new year hangover just got a little more painful as ICICI Bank, SBI and HDFC Bank announced hikes in lending rates. On Friday evening, ICICI increased its base rate and the prime lending rate (PLR) by 0.5 per cent each. A few hours later, India’s top lender, State Bank of India, announced a hike of 0.4 per cent in its base rate and an increase of 0.25 per cent in PLR.
Soon after, SBI’s anno-uncement, HDFC Bank too decided to increase its base rate by 25 basis points to 7.75 per cent. While the rate hike at ICICI Bank and SBI would be effective from January 3, HDFC Bank has decided to increase the rate from January 1.
In a step that would bring cheer to depositors, SBI has also hiked its deposit rates. This is the second hike in deposit rates by SBI over the past month – it had hiked deposit rates earlier in December. In addition to these, ICICI Bank has also increased the reference rate for home loans by 0.25 per cent, which means EMI amounts shall also increase. Now that the largest banks in the public and private sector have revised rates, others are likely to follow suit. Early in December, ICICI was the first amongst the major banks to hike deposit and lending rates. The week after ICICI’s announcement saw a host of public and private sector banks hiking lending rates.
The announcement by ICICI Bank also mentions an increase of 0.25 per cent in the reference rate for home loans — meaning home loans interest rates will go up by that amount. The lender had last hiked lending rates on December 6 by 0.5 per cent on all loans, including home loans. With the second rate hike, the interest rate on home loans has now increased by 0.75 per cent. This means if you have a Rs 20 lakh loan of a 10 year duration, your interest outgo will increase by about Rs 850 a month.
A similar loan of 20 years duration will get costlier by approximately Rs 1,030 a month. The impact will be higher on longer duration loans, where interest forms a larger chunk of the EMI. In case of rate hikes, banks either increase the monthly instalment or increase the number of instalments that you need to pay back.
Financial advisors suggest that for borrowers with long duration loans, part-prepayment of home loans may be a smart idea. Even a small prepayment can substantially reduce the number of instalments outstanding, and it usually carries no penalty. In case a borrower is able to find another lender willing to offer a loan at a substantially lower rate (one or two per cent), it may make sense to change over. This is because while banks charge a penalty of around two per cent of the loan value for prepayment, that’s easily compensated for by the reduced instalment.