RBI's another status quo is what home buyers need? Here's what will happen to home loan EMIs
5 min read 08 Jun 2023, 08:48 PM ISTRBI maintained its repo rate at 6.50%, but with a hawkish policy stance on 'withdrawal to accommodation'. Real estate experts welcomed the decision, saying that as long as the repo rate is not increased, home loan interest rates will remain steady, providing relief for borrowers.
PremiumIt was yet another status quo from RBI, however, the slight hawkish stance pertains as the central bank continued to be focused on "withdrawal to accommodation" on Thursday when they announced the second bi-monthly monetary policy. Nevertheless, real estate experts cheered the policy rate actions and believe that home loan interest rates will be steady as long as the repo rate is not hiked. The move is also likely to drive housing sales momentum. But for how long can home loan EMIs can bear the status quo is the real question that we need to be asking ourselves.
Shiwang Suraj, Founder & Director of InfraMantra said, "Homeowners would be relieved for the time being by the Reserve Bank of India's most recent decision to retain the status quo on the repo rate. Home loan rates will remain steady if the repo rate is not increased. It might also aid in addressing a different rupee-related difficulty."
All six members of the monetary policy committee voted to keep the repo rate unchanged at 6.50%. Subsequently, they also maintained the standing deposit facility (SDF) at 6.25%, while the marginal standing facility (MSF) rate and the Bank Rate at 6.75%.
However, 5 out of 6 MPC members voted for keeping the focus on the policy stance of " withdrawal of accommodation" to ensure that inflation progressively aligns with the target, while supporting growth.
Read here: RBI Monetary Policy: MPC opts for hawkish pause, focused on 4% inflation target; here's what experts say
This would be a second status quo in FY24, after a series of six consecutive rate hikes to the tune of 250 bps from May 2022 to February 2023.
Amit Goyal, Managing Director, of India Sotheby's International Realty said, "The RBI's decision reflects their cautious approach in light of the persistent inflationary pressures and their potential impact on domestic consumption growth."
However, the positive aspect is that the pause in rate hikes will instill a sense of optimism among borrowers and Goyal expect the housing sales momentum to continue.
It needs to be noted that home loans have elevated to 9% and above.
Appreciating the status quo, Pradeep Aggarwal, Founder & Chairman, Signature Global (India) said, home loan borrowers have embraced the previous interest rate hikes, and as long as the home loan interest rates hover around 9% per annum, it is unlikely to have a significant impact on housing demand.
Along similar lines, Vimal Nadar, Head of Research at Colliers India said, "As home loan rates are already at elevated levels of 9% and above, this is a significant breather for lenders, developers & homebuyers. First-time homebuyers will be better placed to make their home-buying decision in a stable lending rate regime. Fence sitters in the affordable & mid segment will have greater visibility of their EMIs & thus effect buying."
Read here: Good time for home loan borrowers ahead? ICICI Bank cuts lending rates, others expected to follow
How will your home loan EMIs move going ahead after RBI's latest policy?
Kaushik Mehta, Founder & CEO of RUloans Distribution explained that with the repo rate remaining at 6.5%, there are potential implications for home loans. Also, the external benchmark lending rates (EBLR) linked to the repo rate will not increase.
For borrowers with existing home loans, Mehta said, "This pause in rate hikes means that their Equated Monthly Installments (EMIs) are likely to remain stable in the short term. If the repo rate remains unchanged, banks may not immediately raise the lending rates for their existing home loan customers. This can provide relief to borrowers with home loans."
However, Mehta also pointed out that it is important to note that the specific terms and conditions of home loans, including interest rates, can vary among lenders.
Hence, he advises borrowers to consult with loan experts or advisors to understand how the RBI's decisions may impact their home loan EMIs.
Read here: HDFC Bank hikes MCLR rates by up to 15 bps on overnight to six months tenure; EMIs to go up
How home loan EMIs are calculated?
The basic formula for home loan EMIs are:
EMI = P x R x [{(1 + R)^N} / {1 – (1+R)^N}]
Here, 'P' stands for the principal loan amount; 'R' stands for your monthly interest rate [(annual rate/12)/100]; and 'N' refers to the total number of months during the loan tenure.
Here's an example on the Bank of Baroda website, on how home loans are calculated.
Say X took a loan of ₹60 lakhs at an interest rate of 8.50 percent. The loan tenure is 20 years. How to calculate home loan EMI?
R = [(annual rate /12)/100] ---(8.5/12)/100= 0.70/100= 0.0070
N = 240 months
EMI = P x R x [{(1 + R)^N}/{1 – (1+R)^N}]= 60,00,000 x 0.00708333 x [{(1 + 0.00708333)^240}/{1-(1 + 0.00708333^240)}]= 50,00,000 x 0.00708333 x [{5.44123824}/{4.44123824}]= 60,00,000 x 0.00708333 x [1.22516243]
Hence, EMI will come to around ₹52,069.
What if a rate hike is stored ahead in FY24?
If a rate hike is stored ahead, Ramani Sastri - Chairman & MD, Sterling Developers said, "Another repo rate hike by the RBI would not augur well for the real estate sector as home loan interest rates are already at a higher level."
Sastri explained that any further increase in policy rates means that interest rates on home loans may hit an all-time high and touch almost double-digit, which could have a substantial impact on buyer sentiments and affordability, which in turn can curtail demand. Another hike would also lead to even higher borrowing costs for developers.
Hence, he expects a continuation of existing policy rates through 2023.
As of now, the decision to keep the repo rate unchanged is a positive development for home buyers and investors, as it provides them with some stability and reduces uncertainty and volatility associated with interest rate fluctuations.
But a rate cut will be icing on the cake for home loan rates...
The realty experts are expecting a rate cut soon enough!
Atul Banshal, Director-Finance, Omaxe said, following a series of successive policy rate hikes, the real estate sector had anticipated some relief from the central bank in the form of a modest rate cut.
Because, as per Banshal, such a move would have bolstered demand and, subsequently, the overall economy. Consequently, he said, "We maintain our expectation that the RBI will opt for a policy rate reduction in the next review meeting, providing a much-needed impetus to various sectors, including real estate, and fostering economic growth."
According to Sastri, undoubtedly, a further reduction in interest rates in the near future would be preferred to bolster overall market confidence and make it more enticing for home buyers and support the growth momentum in the real estate sector.
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