Rising home loan rates have impacted the affordability level of many home seekers. Per Knight Frank India, a commercial real estate consultant, the rising home loan interest rates have massively impacted home buyers’ affordability. The report details the impact on home loan interest rates about bps increase by 150, 100, and 50 and their respective enhancement in the EMI component and decrease in eligibility index level.
RBI will probably keep increasing policy rates to taper the gap between the repo rate and consumer inflation and lower the negative real rate in the Indian economy, which stands at -1.8 percent. A 50-bps increase in the repo rate in June 2022 MPS (monetary policy committee) comes after a 40-bps enhancement in the 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.
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
|The 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 income level are computed, keeping all the variables constant except for the interest rate. To calculate your current EMI on a home loan after a 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 an 11.73 percent enhancement in EMI load and a 3.38 percent fall in eligibility 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 throughout the market over the last twelve months and may also impact eligibility.
What is the current impact of the repo rate increase on home loan interest rates?
Floating home loan rates of banks are mandatorily attached to external benchmarks called repo rates. 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 effect on your home loan rate within three months. When the repo rate increases, the RLLR or repo rate linked lending rate even increases, resulting in rising in the home loan rate. However, in place of enhancing the EMI, many lenders may even increase the loan tenure. For instance, in the case of a 20-year repayment loan, at 7 percent p.a., every 0.25 percent increase in interest rate will enhance the repayment tenure by nearly ten months. The 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.