The repo rate refers to the rate at which commercial banks borrow money from the Reserve Bank of India. If the RBI increases the repo rate, the borrowing cost of retail and other loans by banks, also increases.
The Reserve Bank of India (RBI) announced raising the repo rate by 50 basis points, as the central bank lends money to commercial banks, to 5.40 per cent. This is bad news for borrowers, especially those whose loans are tied to external criteria such as the repurchase rate.
Experts believe that the recent rise in the interest rate is likely to increase the equal monthly payments of borrowers and bring them to their highest level in three years.
Why are housing loans affected by the decision of the Reserve Bank of India?
Generally, when the RBI raises the repo rate, it increases the cost of funds for the banks. This means that the banks will have to pay more for the money they borrow from the Reserve Bank of India. Thus, banks pass the cost on to the borrowers by increasing the interest rates on the loans, which makes EMIs more expensive.
As a result, both new and existing borrowers are seeing an increase in the interest rates on their home loans.
How much of an increase can we expect in home loan rates?
The high repurchase rate, along with inflation, will hit new and existing borrowers hard.
A 140 basis point increase in the past few months means borrowers who used to pay interest at 6.8-7% will now pay 8.2-8.4%.
Adil Shetty, CEO of Bank Bazaar, said while speaking to CNBC-TV18.
For starters, the Reserve Bank of India (RBI) has raised the repo rate by 90 basis points in the past two policies. The first increase was 40 basis points in May and later 50 basis points in June. Looking at the recent rise of 50 basis points, the total rise comes to 140 basis points.
Shetty said it is important to note here that even if some banks agree to keep the monthly payments fixed, according to the calculations, the 20-year loan term can go up by up to 8 years. CNBC-TV18.
However, most lenders will not penalize this increase in term, and it is recognized that an increase in monthly insurance premiums will increase.
Cheshire Bigal, Chairman and Managing Director, Knight Frank India believes that the price hike will reduce the affordability of potential homebuyers by about 11 per cent, i.e. from the ability to buy a home of Rs 1 crore shrinking to Rs 89,000 now.
So, what should borrowers do?
Shetty said having a payment plan is essential because following EMIs alone would mean a very high interest inflow.
“Existing variable rate borrowers with sufficient surpluses should try to prepay their mortgages and choose the tenure reduction option for higher interest cost savings. Home loan borrowers, both new and existing, with limited liquidity, should choose a home saver,” Rattan said. Chaudhry – Head of Home Loans at PaisaBazaar”.
Under the home saving option, an overdraft account is opened as a savings account or a checking account whereby the borrower can set aside his surpluses and draw from them as per his financial requirements. The interest component is calculated after deducting the outstanding surpluses in the Savings Account/Current Account from the outstanding home loan amount.
This would allow home loan borrowers to benefit from prepayment without sacrificing their liquidity.
“Existing home loan borrowers who have seen significant improvements in their credit profile after taking advantage of it should explore the possibility of saving interest cost through home loan balance transfer. Their improved credit profile may make them eligible for home purchase loans at much lower rates than other lenders. This will help them to Reducing the EMI burden and the total interest cost,” Chaudhry added.
Will home purchases also see a drop?
According to Anuj Puri, Chairman of ANAROCK Group, residential sales will see a moderate decline.
“This is the third consecutive rate hike in the past two months, and it finally marks the end of the best-ever low interest rate regime, one of the major factors driving home sales across the country since the pandemic,” said Bury.
He said that this blow came along with the inflationary trends of primary raw materials, including cement, steel, labor, etc., which had recently led to a rise in real estate prices. “All these factors – higher housing loan rates and construction costs – will affect residential sales that have done reasonably well in the first half of 2022,” said Bury.
Hani Katial, founder of the Investors Clinic, believes that an increase in the repurchase rate will result in a commensurate erosion of affordability, which could affect sales momentum.
What are the current home loan rates?
Many banks raised their mortgage rates from May to July of this year. The majority of lenders have tied their lending rates to the repurchase rate.
Here are the latest rates offered by banks on housing loans:
|Banks||Initial interest rate (annually)|
|Central Bank of India||7.55%|
|Union Bank of India||7.40%|
|Bank of Baroda||7.45%|
|Central Bank of India||7.40%|
|Bank of India||6.90%|
(These are the rates before the current increase in benchmark interest rates by the Reserve Bank of India. They are likely to change in the near future.)
First posted: IST