The Reserve Bank of India (RBI) has announced a 35 basis point (bps) hike in the repo rate, at which the central bank lends money to commercial banks, to 6.25 percent. This is the fifth consecutive hike by the RBI and will lead to a rise in the equated monthly instalments (EMIs) of home loans, experts believe.
Those whose home loans are linked to external benchmarks like the repo rate will be majorly impacted.
Why are home loans impacted by RBI's decision?
Generally, when RBI hikes the repo rate, it increases the cost of funds for banks. Banks will have to pay more for the money they borrow from RBI. Consequently, banks pass on the cost to borrowers by increasing their loan interest rates, making EMIs costlier.
As a result, new and existing borrowers witness increased home loan interest rates.
According to Shishir Baijal, Chairman & Managing Director, Knight Frank India, home loan products have become expensive by around 150 bps before today’s hike. The lending rates have risen significantly, especially for the loans linked to External Benchmark based Lending Rate (EBLR) where there has been a 100 percent transmission of repo rate. Loan products linked to MCLR rate are also up by around 108 bps during this period.
How much increase can we expect in home loan rates?
As per experts, the hike will be passed on to home loan borrowers. As a result, home loans will get dearer.
Shrikant Shrivastava, Chief Risk Officer at IMGC (India Mortgage Guarantee Corporation), said that EMIs are expected to increase by another 3-5 percent. As far as loan tenure increase is concerned, he said there is no room for further increase.
"The loan tenor beyond the 13 years is already done till date, due to 190 bps previous increases. There is no more scope," he said.
Keki Mistry from HDFC also said that long-term loans don't get impacted by interest rate movement demand will continue to sustain.
For the uninitiated, RBI has hiked the repo rate by 190 bps in the past three policies. The first hike was to the tune of 40 bps in May and then 50 basis points in June. It again raised the repo rate by 50 bps in August and then again by 50 bps in September. Considering the recent hike of 35 bps, the total rise comes to 225 bps.
So, what should borrowers do?
Borrowers can prioritise pre-payments to control their loan interest.
This will help them in reducing their loan tenures and EMIs. Economies across the globe are grappling with recessionary trends. A time like this calls for people to calibrate their finances to adjust for these difficulties.
Will home demand also see a fall?
This hike will undoubtedly push home loan interest rates, which have already increased after four consecutive rate hikes this year. However, as long as interest rates remain in single digits (mainly within 9.5 percent) the impact on housing will, at best, be moderate, said Anuj Puri, Chairman at ANAROCK Group
"If they breach this point, we will see real pressure on residential sales volumes in the months to come – especially in the affordable and lower mid-range housing segments," he said.
That said, it bears noting that the Indian housing market remains largely end-user driven. Unlike investors, end-users do not look for the lowest entry point but for homeownership's inherent value and benefits. As long as end-users continue to outnumber investors significantly, interest rate-driven impacts on housing sales will not be very pronounced.
The impact of the last four consecutive rate hikes early this year was minimal. This was validated by the outstanding performance of the housing sector in the last quarter (Q3 2022). As per ANAROCK Research, as many as 88,230 units were sold across the top seven cities in the third quarter of 2022 after the three recent rate hikes. Consumer demand remained strong, with sales rising by 4 percent against the preceding quarter and 41 percent annually.
What are the current home loan rates?
Most lenders have linked their lending rates to the repo rate.
Here are the latest home loan rates offered by key banks:
|Banks||Starting Interest Rate (p.a.)||Processing Fees|
|Kotak Mahindra Bank||7.50% p.a. onwards||0.50%|
|Citibank||6.65% p.a. onwards||Rs. 10,000|
|Union Bank of India||8.25% p.a. onwards||-|
|Bank of Baroda||7.45% p.a. onwards||Contact the bank for information|
|Central Bank of India||7.20% p.a. to 7.65% p.a.||Rs. 20,000|
|Bank of India||7.30% p.a. onwards||-|
|State Bank of India||8.55% p.a. onwards||0.35% onwards|
|HDFC||8.60% p.a. onwards*||0.5% or Rs.3,000 whichever is higher|
|LIC Housing Finance||7.55% p.a. onwards||Rs. 10,000 -Rs. 15,000|
|Axis Bank||7.60% p.a. onwards||Rs. 10,000|
(These are the rates before today's increase in benchmark interest rates by the RBI. They are likely to change in the near future.)