March 23, 2023

There is bad news for ICICI Bank home loan customers. The bank has announced a hike in its external benchmark lending rate by 50 basis points (100 bps = 1%) after the Reserve Bank of India (RBI) hiked the key policy rates for the fourth time in this financial year. Along with this bank has also hiked the marginal cost of funds lending rate (MCLR) as well.

As per the bank’s website, “ICICI Bank External Benchmark Lending Rate” (I-EBLR) is referenced to RBI Policy Repo Rate with a mark-up over Repo Rate. I-EBLR is 9.25% p.a.p.m. effective September 30, 2022.”
With respect to MCLR, the bank has hiked the interest rate by 10 bps.

Tenure MCLR rate as on Oct 1, 2022 MCLR rate as on Sept1, 2022
Overnight 7.85% 7.75%
One month 7.85% 7.75%
Three month 7.90% 7.80%
Six month 8.05% 7.95%
One year 8.10% 8%

Source: ICICI Bank website

How it will impact borrower’s EMI outgo
With the hike in the home loan interest rate (both EBLR and MCLR), your EMI outgo will also rise. However, when the hike will hit you depends on the benchmark with which your home loan is linked.

If you have taken a home loan before October 1, 2019, then it is likely that your home loan is linked to MCLR. Typically, MCLR home loan is linked to a one-year MCLR rate. The banks’ add margin/spread on the MCLR rate to arrive at the interest rate on the home loan.

As per the RBI guidelines, “ The periodicity of the reset under MCLR shall correspond to the tenor/ maturity of the MCLR to which the loan is linked.” Hence, if your home loan is linked to a one-year MCLR, then a reset will happen on a yearly basis.

In the case of EBLR, the external benchmark lending rate is reviewed and reset once every three months. The hike in EBLR from today will be reflected in this month’s EMI. Hence, any change in the external benchmark lending rate is passed on quickly to the borrowers as compared to the MCLR.

Here is an example of how a hike of 50 bps in ICICI Bank’s EBLR will impact EMI outgo.

Suppose you have taken a home loan of Rs 30 lakh for a tenure of 20 years. The old interest rate on a home loan is 8.75% and the new interest rate on a home loan is 9.25%.

Loan Amount Rs 30,00,000
Tenure 20 years
Old home loan interest rate 8.75%
Old EMI amount Rs 26,511
New home loan interest rate 9.25%
New EMI amount Rs 27,476
Increase in EMI Rs 965

For the purpose of calculation, it is assumed that there is no credit risk premium charged.

Can a borrower switch lending regimes?
If a borrower has a home loan linked to MCLR and wants to switch to an external benchmark linked, then she can do so. The borrower will have to inform the bank and administrative charges for the same.

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