Bad news for homebuyers as the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) move earlier this morning to increase interest rates by another 50 basis points. This brings the total interest rate hike to 5.9%.
The direct impact of this is going to be on those who already have home loans running or are looking to buy a house and take a home loan to fund it.
Banks base their home loan interest rates on RBI's benchmark rates. When the RBI increases interest rates, banks also reset the interest rates. In today's update, since the RBI has revised the rates upwards, banks are likely to raise interest rates further, especially home loans.
“I reiterate my earlier advice that borrowers can prioritise pre-payments to control their loan interest. This will help them in reducing their loan tenors and EMIs. Economies across the globe are grappling with recessionary trends. A time like this calls for people to calibrate their finances to adjust for these difficulties," said Adhil Shetty, CEO, BankBazaar.com.
ALSO READ: Home Loans: How much money do you stand to save if you prepay your loan? Let's take a look
"If you took a home loan at 7% for 20 years, your per lakh interest is ₹86,071. Your per lakh EMI is ₹775. If your rate goes to 8.9% after 3 months, you had 237 EMIs left but now it could theoretically go to 410 months assuming the same EMI. Assuming a bigger EMI, the tenor extension will be smaller. But at 410 months, your loan is 173 months or nearly 14.5 years longer. At this stage, if you made an immediate pre-payment 17 times your EMI, your tenor reduces to 236 months. Four pre-payments of 4.5 times EMI once every 12 months has roughly the same effect in reducing your tenor," he said.
"With this rate hike, home loans will get dearer soon. This could impact residential sales to some extent during the upcoming festive quarter, particularly in the affordable and mid-range housing segments, said Anuj Puri, chairman, Anarock Group.
The silver lining is that only when the home loan interest rates breach the 9.5% mark will housing sales see a ‘High Impact’. If rates remain between 8.5-9%, the impact is expected to be moderate, he said.
RBI governor Shaktikanta Das in his speech today said inflation continues to be alarmingly high. It is this why the RBI and central banks across the world have been raising interest rates.
Rising interest rates mean people have less money to spend as their loan EMIs get costlier. With less money, the spending goes down which leads to fall in demand. This in turn leads to prices of products falling which ultimately leads to fall in inflation.
5 out of 6 members of the MPC voted unanimously to raise the repo rate by 50 bps.
