The current interest rate environment is one of the toughest for borrowers in recent times. Recent increases in the repo rate by the Reserve Bank of India (RBI) have surprised several investors. Although the move is intended to control inflation, it could have a slight impact on the lending industry.
With the current increase in repo rate by 50 basis points, home loan interest rates are at a slight increase. These housing loan interest rate hikes are a result of a rising monetary policy, whereby banks are required to keep their lending rates above a certain threshold and not drop below that limit. For an average borrower, this means you will have to pay a higher interest rate on your home loan, which can be quite stressful if you’re already stretched financially.
However, it’s not all doom and gloom. It is good for the long run as it forces banks to be more responsible with their lending practices, which is exactly what we need at this moment as there has been enough risky mortgage lending over the past few years. Let us take a closer look at what these repo rate hikes mean for you as an individual and for your home loan.
What is Repo Rate?
The repo rate is the rate at which banks borrow money from the RBI for short-term financing purposes. The RBI uses repurchase agreements for liquidity management by borrowing money from commercial banks to add liquidity to the financial system. Banks borrow from the RBI and promise to pay it back with interest after a certain period. The rate of interest (interest rate) at which banks borrow money from the RBI is called repo rate.
This increase in the repo rate has a significant impact on all major loan categories covered under repo-linked lending rate (RLLR). Those with floating interest rates on loans for cars, gold, homes, or personal property will be affected immediately by the increase in repo rates. On the other hand, fixed-rate loans won’t get more expensive immediately since it takes time for the effect to take place.
How Does Repo Rate Hike Impact Home Loan Borrowers?
A repo rate hike means that banks will have to pay more interest to borrow money from the RBI. As a result, banks will also charge higher interest rates on home loans. You can therefore expect an increase of 50-100 basis points in home loan interest rates, making your equated monthly installments (EMIs) more expensive.
If you are planning to take a home loan shortly, it is important to factor in the possibility of a repo rate hike. You should consider how an increase in EMIs will affect your budget and whether you will still be able to afford your loan repayments.
What Will a Hike in Repo Rate Mean for Your EMIs?
Approximately 40% of loans are linked to external benchmarks, which will result in increased borrowing costs for new and existing borrowers. Let’s understand this with the help of an example:
If you take out a home loan for INR 50 lakh at 6.75% interest, the monthly EMIs would be INR 44,245. An increase in interest rate to 7.25% would result in an increase in the EMI to INR 45,643. An interest rate increase of 0.5% will increase your monthly loan payments by approximately INR 1400 to INR 1600.
While this may be a cause for concern for borrowers, it must be noted that the repo rate hike is not expected to have a major impact on home loan interest rates. This is because banks had already started to increase lending rates in anticipation of the RBI’s move.
Thus, while EMIs are set to become more expensive, the impact is not expected to be very significant. So, if you are looking to take a home loan, it would be prudent to lock in your interest rate at the current levels to avoid any further increase in EMIs.
What Can Borrowers Do to Manage a Repo Rate Hike?
Home loan EMIs are on the rise, and you’re not alone. When the repo rate increases, it becomes more expensive for banks to borrow money. As a result, banks may pass on this increased cost to customers in the form of higher interest rates on loans. This can have a significant impact on borrowers, especially those who have loans with variable interest rates.
While increasing EMIs, many homeowners find it difficult to manage their finances. The following tips will help you manage your home loan EMIs and stay within your budget.
1. Make a budget and stick to it: Maintaining a budget is one of the easiest ways to manage your home loan EMIs. This will help you to track your expenses and make sure you are not spending more than you can afford.
2. Prepay your loans: If you have the extra cash on hand, prepaying your home loan can save you money in the long run. When you prepay, you are essentially paying down the principal of your loan. This means that you will pay less interest over the life of the loan. In addition, if you have a fixed-rate loan, prepaying can protect you from rising interest rates.
3. Balance transfer your loan: For those whose EMIs are becoming unmanageable, consider transferring your home loan. By doing so, you will be able to reduce your monthly payments and get a lower interest rate. To get the best deal you can compare interest rates from different lenders and get the best deal possible.
Is It Still Worth Taking a Home Loan Right Now?
There is no doubt that the current environment of a repo rate hike is not conducive to taking a home loan. However, this does not mean that it is not worth taking a home loan at all. There are several factors to consider when deciding to take a home loan, and the current environment of a repo rate hike should be just one of them.
For example, the current interest rates on home loans are still relatively low, and this is likely to continue for the foreseeable future. Additionally, the current environment of repo rate hikes is not expected to last forever, and eventually, the rates are likely to come down again.
Also, by locking in a higher rate, borrowers can save money on their monthly payments and pay off their loans faster. In addition, the rate increases have helped to spur home sales, as buyers are eager to take advantage of low rates while they last. For those considering a home loan, now is a great time to lock in a low rate. Interest rates are expected to continue to rise in the coming months, so borrowers who lock in a rate now can save themselves money in the long run.
Ultimately, the decision of whether or not to take a home loan in the current environment of a repo rate hike should be based on careful consideration of all the relevant factors.
Should One Consider Switching to Fixed-Rate Home Loans?
The recent increase in repo rate has led to an increase in home loan interest rates. This is a good time for borrowers to consider switching to fixed-rate home loans and lock in their rates for the next few years. It may be possible for you to lock in a lower interest rate over the life of your loan while interest rates remain historically low. Making the switch, however, comes with some considerations.
For those seeking predictability and stability, fixed-rate loans may be a wise choice. You will always know the amount of your EMI payments with a fixed-rate loan because your interest rate will remain the same throughout the loan term.
Fixed-rate mortgages are popular among borrowers because they offer stability and predictability. They are also more cost-effective when it comes to repayments and budgeting becomes easier and you can be assured that your payments won’t rise if interest rates rise.
Alternatively, a flexible-rate loan may be a better choice if you want to minimize the amount of interest you pay. In a flexible-rate loan, you pay interest at a rate that fluctuates with the market, so you could see an increase or decrease in payments over time. It is possible, however, that you could save money in the long run by taking out a lower interest rate when taking out the first loan.
The decision to switch should depend on how much risk you are willing to take. If you are unsure of what is the best option for you, discuss your options with your lender.
What will happen in the case of an increase in interest rates? Certainly, this will reduce the demand for real estate, but the situation may not be as catastrophic as it might appear at first glance.
The first thing to consider is that India’s housing market has been largely underdeveloped up until now and there is significant pent-up demand from a very large population base. Secondly, mortgage loans are only granted to those who have sufficient income to repay loans comfortably and with minimum risk to banks. And finally, higher interest rates may deter some buyers from buying, while others may see it as an opportunity to get in before rates rise further.
You should weigh your options and determine what makes financial sense for you.