Interest rates for home loans are set to further rise after mortgage lender HDFC on Saturday announced a 25 basis points hike.

The Reserve Bank of India (RBI) is expected to raise the repo rate in its bi-monthly monetary policy this week as part of its sustained effort to tame inflation.  The lending rates for banks are directly linked to the RBI’s repo rate.

For most banks, credit growth is also tending to outpace deposit growth. This will push deposit rates up, implying that the cost of funds for banks will rise in the coming weeks.

“Banks will further elevate their home loan rates as cost of funds rise for them. HDFC’s move will be followed by the other banks,” said a senior bank official who looks after the retail segment.

HDFC has increased its benchmark lending rate by 25 basis points, prompting costlier home loans for both existing and new borrowers.

"HDFC increases its Retail Prime Lending Rate (RPLR) on housing loans, on which its Adjustable Rate Home Loans (ARHL) are benchmarked, by 25 basis points, with effect from August 1, 2022," the housing finance company said in a statement.

This is the fifth hike effected by HDFC in two months. With this, the mortgage lender has increased the rate by 115 basis points since May.

HDFC’s home loan rates now start at 7.8%, the highest in two years but still lower than the pre-Covid level. They range between 7.8% and 8.3% for new borrowers, depending on credit and loan amount. 

For existing customers, the rates will rise by 25 basis points (0.25%).

HDFC follows a 3-month cycle for repricing its loans to existing customers. So, the loans will be revised in sync with the increased lending rate based on the date of the first disbursement of each customer.

Financial institutions have been raising interest rates following the RBI’s repo rate hike by 40 basis points in May and 50 basis points in June. The RBI is expected to increase the repo rate by 35-50 basis points in its monetary policy this week.