The current interest rate environment is one of the most challenging for borrowers in recent times. Recent increases in the repo rate by the Reserve Bank of India (RBI) surprised many investors. Although this decision aims to control inflation, it could have a slight impact on the lending sector.
With the current repo rate increase of 50 basis points, interest rates for home loans are up slightly. These increases in mortgage interest rates are the result of a bullish monetary policy, which obliges banks to maintain their lending rates above a certain threshold and not to fall below this limit. For an average borrower, this means you’ll have to pay a higher interest rate on your home loan, which can be quite stressful if you’re already financially strained.
However, all is not gloomy. It’s good in the long run because it forces banks to be more responsible in their lending practices, which is exactly what we need right now because there have been enough risky mortgages in recent years. Let’s take a closer look at what these repo rate hikes mean for you as an individual and for your home loan.
What is the pension rate?
The repo rate is the rate at which banks borrow money from the RBI for short-term funding 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 repay it with interest after a certain period. The rate of interest (interest rate) at which banks borrow money from the RBI is called the repo rate.
This increase in the repo rate has a significant impact on all major categories of loans covered by the repo-linked lending rate (RLLR). Those with floating interest rates on loans for cars, gold, homes or personal property will be immediately affected by rising repo rates. On the other hand, fixed rate loans will not become more expensive immediately as it takes time for the effect to occur.
What is the impact of the rise in the pension rate on mortgage borrowers?
A hike in repo rates means 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 a 50 to 100 basis point increase in home loan interest rates, which will make your monthly equivalent payments (EMI) more expensive.
If you are planning to take out a home loan soon, it is important to take into account the possibility of a rise in the repo rate. You should consider how an increase in EMIs will affect your budget and whether you will still be able to repay your loans.
What will an increase in the pension rate mean for your IMEs?
About 40% of loans are linked to external referrals, which will increase 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 the 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 payment by around INR 1,400 to INR 1,600.
While this may worry borrowers, it should be noted that rising repo rates are not expected to have a major impact on home loan interest rates. This is because banks had already started raising lending rates in anticipation of the RBI’s decision.
So while IMEs are set to become more expensive, the impact should not be very large. So if you are looking to take out a home loan, it would be prudent to lock your interest rate at current levels to avoid any further increases in EMIs.
What can borrowers do to manage a rise in the repo rate?
EMIs for home loans 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 can pass this increased cost on to customers in the form of higher interest rates on loans. This can have a significant impact on borrowers, especially those with variable interest rate loans.
While increasing EMIs, many owners find it difficult to manage their finances. The following tips will help you manage your home loan EMIs and stay on budget.
1. Set a budget and stick to it: Maintaining a budget is one of the easiest ways to manage your home loan EMI. This will help you track your spending and make sure you’re not spending more than you can afford.
2. Repay your loans early: If you have extra cash, paying off your home loan early can save you money in the long run. When you prepay, you are essentially repaying the principal of your loan. This means that you will pay less interest over the life of the loan. Also, if you have a fixed rate loan, prepayment can protect you from rising interest rates.
3. Transfer your loan balance: For those whose IMEs are getting unmanageable, consider transferring your home loan. By doing so, you will be able to lower 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 out a home loan right now?
There is no doubt that the current environment of rising repo rates is not conducive to taking out a home loan. However, this does not mean that it is not worth taking out a home loan at all. There are several factors to consider when deciding to take out a home loan, and the current environment of rising repo rates should be just one of them.
For example, current interest rates on home loans are still relatively low, and this is expected to continue for the foreseeable future. Moreover, the current environment of rising repo rates is not likely to last forever and, eventually, rates are likely to fall again.
Plus, by locking in a higher rate, borrowers can save money on their monthly payments and pay off their loans faster. Additionally, rate hikes have helped boost home sales as buyers are eager to take advantage of low rates while they last. For those considering a home loan, now is the perfect time to get a low rate. Interest rates are expected to continue to rise over the next few months, so borrowers who lock in a rate now can save money in the long run.
Ultimately, the decision of whether or not to take out a home loan in the current environment of rising repo rates should be based on careful consideration of all relevant factors.
Should you consider switching to a fixed rate mortgage?
The recent increase in the repo rate has led to an increase in mortgage interest rates. Now is a good time for borrowers to consider switching to fixed rate home loans and locking in their rates for the next few years. You may be able to lock in a lower interest rate for the life of your loan while interest rates remain historically low. Making the switch, however, comes with a few considerations.
For those looking for predictability and stability, fixed rate loans can be a smart choice. You will always know the amount of your EMI payments with a fixed rate loan because your interest rate will remain the same for the duration of the loan.
Fixed rate mortgages are popular with borrowers because they provide stability and predictability. They are also more cost effective when it comes to repayments and budgeting becomes easier and you can rest assured that your payments will not increase 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 might see payments increase or decrease over time. However, you may be able to 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 the level of risk you are willing to take. If you are unsure which option is best for you, discuss your options with your lender.
Conclusion
What will happen if interest rates rise? Certainly, this will reduce the demand for real estate, but the situation may not be as catastrophic as it seems at first glance.
The first thing to consider is that the Indian housing market has been largely underdeveloped so far and there is significant pent up demand from a very large population base. Second, mortgages are only granted to those with sufficient income to repay the loans comfortably and with minimal risk to the banks. And finally, higher interest rates may deter some buyers from buying, while others may see an opportunity to get in before rates rise further.
You need to weigh your options and determine what is right for you financially.