Rising home loan rates have impacted the affordability level of many home seekers. As per Knight Frank India, a commercial real estate consultant, rising home loan interest rate has massively impacted the affordability of home buyers. The report provides details on the impact on home loan interest rate in reference to bps increase by 150, 100 and 50 and their respective enhancement in EMI component and decrease in eligibility index level.
A 50-bps increase in repo rate in June 2022 MPS (monetary policy committee) comes after 40 bps enhancement in repo rate in May 2022. Moreover, in mid-June, RBI also increased its inflation assumption for FY 2022-23 from 5.70% to 6.70%. Note that this level is much higher than RBI’s upper tolerance level of 6 percent. RBI will most probably keep increasing policy rates to taper the gap between repo rate and consumer inflation and lower the degree of negative real rate in the Indian economy, which stands at -1.8 percent.
While home loan rates are still below the pre-pandemic times, it is important to understand the impact of an increase in home loan interest rates on EMI and ultimate eligibility levels.
Impact of increase in home loan interest rates on EMI and eligibility
|Rise in home loan rate (bps)||Rise in EMI||Fall in Knight Frank eligibility index level (equated monthly income/your household income)|
|150||11.73 percent||3.38 percent|
|100||7.76 percent||2.23 percent|
|50||3.84 percent||1.11 percent|
Remember: Eligibility and level of income are computed keeping all the variables constant except for rate of interest. To compute your current EMI on home loan after repo rate increase, use an online home loan EMI calculator.
Home loan interest rates are still nearly 150 bps less than those in 2019 and reversion to such levels will lead to about 11.73 percent enhancement in EMI load and 3.38 percent fall in eligibility as per Knight Frank Eligibility Index. Such analysis doesn’t account for any change in home prices or income levels and factors in the home loan rates as the sole variable. Home price levels have enhanced over the last twelve months throughout the market and may also have an impact on eligibility.
What is the current impact of the repo rate increase on home loan interest rate?
Floating home loan rates of banks are mandatorily attached to external benchmarks, called repo rate. So, whenever the repo rate changes, there is an impact on your EMI or repayment tenure. As repo rate transmission is instant, you must view an impact on your home loan rate within 3 months. When repo rate increases, RLLR or repo rate linked lending rate even increases resulting in rise in home loan rate. However, in place of enhancing the EMI, many lenders may even increase the loan tenure. For instance, in case of 20-year repayment loan, at 7 percent p.a., every 0.25 percent increase in interest rate will enhance the repayment tenure by nearly 10 months. Repo rate has increased by 90 bps in 2 tranches, thus if your home loan’s tenure is 19 years and the rate is enhanced by 0.75 percent, be ready to witness nearly thirty more EMIs.