16 JUNE, 2022

Any change in the repo rate has a direct impact on the housing loan interest rates as the cost of borrowing goes up for the lenders. Considering the surging inflation rate in the country, at the beginning of May, RBI increased the repo rate by 40 basis points, increasing the repo rate from 4% to 4.4%. This has led several public and private sector lenders to increase their benchmark home loan interest rates as well.

What does RBI’s repo rate hike mean for you?

An increase in the repo rate triggers lenders to increase their housing loan interest rate benchmarks. This, in turn, also increases the interest rate at which you can get a home loan. This increases your EMI amount when you are planning to buy a house for the same tenure. For existing home loan borrowers, it is not your Equated Monthly Instalment (EMI) that is increased, rather the number of EMI payments you have to make tends to grow in a rising interest rate environment. Changes in interest rates matter if new or existing loan borrowers have a floating interest rate. But for fixed interest rate loans, these hikes are not relevant.

As a new homebuyer, the housing loan interest rate you can get will be higher even if you have a great credit score and overall financial profile. This is because floating home loan interest rate is linked to external benchmark. Any change in repo will have direct impact on the interest rate.

Is this a good time to buy a new house?

When you consider the rising home loan interest rates, rising prices in the real estate market, and inflationary pressures in construction, you might stop to think if right now is a good time to buy a new house. To arrive at an answer to this question, you have to consider not just the current macroeconomic scenario but also your financial situation.

Depending on your goal to buy a house, the down payment you have saved, your current needs and life stage, the anticipated increases in income and expenses, etc., you will have to determine this. That’s because when it comes to buying an asset like a house, your personal financial conditions matter significantly more than the momentary changes in economic trends. For instance, on a housing loan of Rs 80 lakhs with an interest rate of 7% for 15 years, the EMI would be Rs 71,906 and the total interest outgo would be Rs 49,43,127. With a 0.4% increase and the new interest rate being 7.4%, the EMI would be Rs 73,707 and the interest outgo would now be Rs 52,67,280. This would mean an EMI difference of around Rs 1,801.

If everything else is aligned, you may not want to delay buying your home and setting down your roots for an additional 0.4% interest. This call, however, has to be made after careful consideration of your home loan affordability. Hence, before you decide to buy a house and apply for a home loan, make sure to have a solid loan repayment plan in place. You can do this by using a home loan EMI calculator and a home loan eligibility calculator.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.