While rising lending rates are yet to deter new home buyers, those who had borrowed when the rate was at a decadal low last year, are beginning to face the heat.
Home loans have been among the most sought-after products, accounting for a bulk of a retail lending boom in the banking sector. Given that all home loans since October 2019 are linked to external benchmarks – mostly to the Reserve Bank of India’s repo rate – the 140 basis points (bps) rise in the key benchmark rate since May has led to a corresponding increase in home loan rates.
For instance, State Bank of India’s home loan rates have risen from 6.7% in September 2021, to 8.05% now. Private lender Kotak Mahindra Bank, which was offering one of the lowest rates on home loans, at 6.5%, in September, has increased it to 7.99% now.
Consequently, say, a borrower who availed a loan of ₹75 lakh last year payable over 20 years, will have to shell out an additional interest of ₹74,000- 81,000 every year.
“The time for repaying slowly is over," said Adhil Shetty, chief executive officer of financial services marketplace BankBazaar.com.
Shetty said the 140 basis point increase means that today, even for a 20-year loan, the amount of interest to be repaid is higher than the principal. To reduce the burden of the increase in loan rates, an existing borrower has to consider refinancing their loan, pre-paying periodically, voluntarily increasing their equated monthly instalments (EMIs), or have a viable mix of the three options, he said.
Bankers said while it is too early to say whether rising interest rates would impact home loan demand, existing borrowers will see monthly repayments increase. A senior private sector banker said, on the condition of anonymity, that considering interest rates are rising every two months, the impact on demand will be somewhat visible when rates stabilize after a few months. “We will look at an internal exercise to check how our home loan borrowers are faring in this scenario."
Existing customers under the floating rate home loan scheme have the option to either opt for higher EMIs or to extend the loan tenure when rates increase, he added.
However, there is a catch. Shetty of BankBazaar said if EMI remains constant, the tenor for a 20-year loan can go up around eight years. As most lenders are not likely to sanction increasing the tenor, EMIs will increase for a significant percentage of loans, especially those disbursed recently , he said.
Banks’ total outstanding home loans stood at ₹17.4 trillion in June, up 15.1% from the previous year, showed RBI data. This is higher than the 11% year-on-year growth reported in June 2021.
According to a report by Bank of Baroda’s economist Aditi Gupta, while higher loan rates may deter some borrowers from the housing market, the demand for housing as a safe investment is likely to offset this. Besides, individual home buyers will be prepared for interest rates to move up and down during the tenure of their loans and, hence, may not be deterred from such purchases, she said in a 24 August report. “The growing importance of home loans can be gauged from the fact that the ratio of outstanding individual home loans by scheduled commercial banks and housing finance companies in India’s gross domestic product (GDP) has grown substantially in the last 10 years."
From 6.8% of India’s GDP in FY11 it was at 11.2% in FY21, showed data available in the report cited above.
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