How will rising interest rates affect your home loans?

The Reserve Bank of India recently hiked the Repo rate by 0.40%, given the ongoing onslaught of inflation. Most financial experts were signaling that a rate hike was on the way, but not until June 2022. However, the Monetary Policy Committee took everyone by surprise by citing various factors for the rate hike. The first is consumer price index (CPI) inflation at a 17-month high of 6.95% for March 2022, together with wholesale price index inflation (WPI ) hit a 4-month high of 14.55% from 7.89%. the previous year during the same period.

A rate hike after four years

Given the recent rise in interest rates, it is clear that the cost of accessing a loan is set to rise even more in the months ahead. For most small loans, the upside will play a crucial role in the overall cost of using the funds, but for the home loan, it should pull the whole real estate market towards growth after having suffered from stagnation for almost three years now. Before and during the Covid-19 pandemic, the cost of acquiring a property was low as markets were flooded with unsold inventory and buyer sentiment was poor, in order to reduce net losses most builders sold existing inventory without taking sufficient margins.

Global Factors Affecting Real Estate

At a time when the global supply chain is disrupted due to the ongoing war and post-pandemic logistics issues, prices for raw materials like cement and steel have increased by approx. 6-8% and manufacturers have no choice but to pass it on to consumers, which will be an additional cost to bear. However, some leading real estate consultants suggested this would boost consumer sentiment even further, as house prices showed no signs of improving before the pandemic and, with excess inventory available, rates were very competitive.

Key points to remember for home loan borrowers

In the coming months, the central bank aims to curb inflation with subsequent rate hikes and is also putting in place a mechanism to absorb excess liquidity from the markets, especially public and private banks. Annual wage growth in the country is around 10%, while inflation is around 7.00%. With MCLR rates being hiked by some banks, real estate agents expect borrowers to factor in the inflated cost of inventory, which will ultimately hurt overall house price growth and prevent buyers from sustaining a buy position.

Let’s take an example to understand the impact of rate increases on a home loan EMI:

Amount used: Rs. 30 Lakh, for a term of 10 and 20 years, at the current interest rate compared to what it would be one year later and a fixed rate loan for the entire repayment term:

Duration 10 years:

New

After 1 year

Fixed

Amount of the loan

INR 30,00,000

INR 30,00,000

INR 30,00,000

Interest rate (pa)

7.10 percent

9.10 percent

8.20 percent

NDE

INR 34,987

INR 38,165

INR 36,716

Total interest

INR 11,98,483

INR 15 79 834

INR 14.05.931

During a period of ten years in a floating rate linked Repo, a borrower will spend an additional Rs. 1,449 in EMI and Rs. 1,73,903 in aggregate interest payment. Floating rates were more beneficial as long as interest rates were kept to a bare minimum due to the pandemic.

20-year mandate:

New

After 1 year

Fixed

Amount of the loan

INR 30,00,000

INR 30,00,000

INR 30,00,000

Interest rate (pa)

7.10 percent

9.10 percent

7.50 percent

NDE

INR 23,439

INR 27,185

INR 25,468

Total interest

INR 26,25,452

INR 35,24,405

INR 31,12,295

Now, if we consider a scenario where the repayment tenure is 20 years, the difference between a variable rate and a fixed rate EMI is INR 1,717 and the interest payable would be INR 4,12,110 of more than the other.

Fixed or Floating? think wisely

As interest rates are on an upward trend and there are no signs of rate cuts in the near future, first-time home buyers and other home loan borrowers should wait anxiously. benefit from fixed rate loans instead of floating loans to save a decent sum in EMI and interest payments longer term. Once inflation has returned to close to normal, borrowers can make use of the transfer facility to convert their fixed rate into a variable rate if the rate difference is minimal and in their favour.


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