If RBI hikes rate by 25 bps, home loan interest rates may hit all-time high. How to manage your EMIs

The home loan interest rates move parallel to policy repo rates! If RBI hikes the policy rate, the aftereffect of it is also seen in home loans. And hence, your EMIs get costlier. The reason behind this would be that rate hikes usually lead to a spike in the cost of funds for banks and hence the lenders pass on the impact to end borrowers. RBI is set to announce its first bi-monthly monetary policy for FY24 on Thursday. And chances of a rate hike are in the offing yet again. However, experts hope for a 25 bps hike --- but if that is the case --- then home loan rates are expected to hit an all-time high.

Since the time RBI began the rate hike cycle in line with other central banks to tackle inflation, there has been a significant jump in banks' lending and deposit rates.

Another rate hike is expected to not augur well for the real estate sector.

As per RBI's latest data, the weighted average lending rate (WALR) on fresh rupee loans of SCBs increased by 24 basis points (bps) from 9% in January 2023 to 9.24% in February 2023. While WALR on outstanding rupee loans of SCBs increased by 9 bps from 9.58% in January to 9.67% in February.

Ramani Sastri, Chairman and MD, of Sterling Developers said, "The macro-economic fundamentals of the country are strong and the economy is performing well. The residential market's winning streak continued in the first quarter of 2023 despite the hike in interest rates over the past year. India’s housing sector is witnessing possibly the biggest boom in the last decade, driven by various factors such as affordability, lifestyle upgradation, and aspiration of customers to own homes and we see this up-cycle continuing in 2023."

Sastri explained that fuelled by both end-user and investor interest, the real estate market has shown resilience where buyers are carefully filtering out projects and looking for the right product mix in terms of affordability, accessibility, and quality of living. Hence, in such a context, another repo rate hike by the RBI will not augur well for the real estate sector.

As per him, home loan interest rates are already at an alarmingly higher level of 9.5% and above due to the increase in repo rates in the recent past. 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.

"This might slowdown home buying decision for a short to medium term. Another hike will lead to even higher borrowing costs for developers too," Sastri added.

Also, Shishir Baijal, Chairman & Managing Director, Knight Frank India said, “in FY23, the RBI cumulatively hiked the repo rate by 250bps from 4% to 6.5%., levels witnessed in Jan 2019. From a housing market perspective, despite a sharp rise in repo rate which has immediately transmitted into lending rates, the housing demand has continued to sustain thus far. The outstanding home loans grew by 15% in FY23 (Until Feb 2023).”

Baijal added, "any further rate hikes coupled with elevated prices could potentially dampen the purchasing capacity of the consumers, which in turn can curtail demand. Therefore, we remain cautious of the impact of prolonged rate hikes on the housing sector as well as overall consumer demand in the economy.”

RBI's data further revealed that 1-year median MCLR has climbed to 8.55% in February from 8.45% in January. Also, the share of external benchmark lending rate (EBLR) on total outstanding floating rate rupee loans surged to 48.3% by end of December 2022, while MCLR-linked loans increased to 46.1%.

Due to inflationary pressures, RBI took the route of a rate hike since May last year. The central bank has increased the repo rate six times in a row -- taking the total hike to 250 bps. The repo rate has shifted from 4% to a four-year high of 6.50%.

Inflation continues to be sticky and above RBI's upper tolerance limit of 6%. India's CPI inflation eased slightly at 6.44% in February 2023.

In regards to home, Ravi Subramanian, MD & CEO, Shriram Housing Finance expects RBI to take note of the rate hike impact of stretched EMIs and loan tenures on home loans.

Shriram Housing's MD said, "as the central banks of the developed economies such as the US Fed, European Central Bank and Bank of England have continued with hiking rates, we expect the MPC to follow with a hike of 25bps or lesser this week. consumer prices and core inflation have remained high and are a cause of concern. As the prevailing economic scenario calls for higher rates, we expect the policymakers to take note of the impact of stretched EMIs and loan tenures on the home loan and home-buying demand. Home loan growth for the industry has been in the mid-teens and in the affordable segment demand has been higher and we expect that momentum to sustain despite higher rates.”

Similarly, expecting a 25 bps rate hike from RBI in April policy, Atul Monga, Founder, and CEO, of Basic Home Loan said, "with the continuous rise in interest rates, it has led to higher EMI’s for home loan buyers impacting affordability, especially for the affordable housing segment."

He added, "In the rising interest rate scenario, it's important for consumers to structure their home loan in a way that allows them to manage their monthly payments and overall debt."

Here are some steps you can take to structure your home loan in the face of rising interest rates as per Atul:

1. Choose a fixed-rate loan: When interest rates are rising, it's often a good idea to choose a fixed-rate home loan over an adjustable-rate home loan. With a fixed-rate mortgage, your interest rate will remain the same throughout the life of the loan, so you won't have to worry about your monthly payments increasing with rising interest rates.

2. Consider a shorter loan term: Another way to structure your home loan is to consider a shorter loan term. While a 30-year home loan may have a lower monthly payment, a shorter loan term, such as 15 or 20 years, will allow you to pay off your mortgage faster and reduce the overall amount of interest you'll pay over the life of the loan.

3. Increase your down payment: If you have the ability to do so, increasing your down payment can also help you structure your home loan in the face of rising interest rates. By putting more money down upfront, you'll reduce the amount of principal you have to borrow and lower your monthly payments.

4. Refinance your existing home loan: If you already have a mortgage and interest rates have risen since you took out the loan, refinancing may be a good option. Refinancing to a lower interest rate can help you reduce your monthly payments and the overall amount of interest you'll pay over the life of the loan.

5. Keep an eye on interest rates: Finally, it's important to keep an eye on interest rates and be prepared to take action if they start to rise. This may include refinancing your loan, adjusting your monthly budget to accommodate higher payments.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.