The Reserve Bank of India (RBI) has decided to keep the repo rate unchanged at 6.5 percent, which has brought relief to home loan borrowers. This marks the second instance where the central bank has paused the rate hike, indicating that interest rates are stabilizing. For existing home loans, the pause in the repo rate will not affect the equated monthly installments (EMIs). However, borrowers with floating rate loans can benefit from this rate pause. The decision is seen as a positive development for the housing sector’s continued growth.
Impact of Rate Hike on Home Loan EMIs
Over the past year, there has been a rate hike of 2.5 percent, leading to an increase in EMIs for home loan borrowers. The hike has resulted in EMIs going up by almost 16 percent for a 15-year loan, 20 percent for a 20-year loan, and 26.5 percent for a 30-year loan. This has put financial pressure on borrowers and has led to lenders increasing the tenure of the loan or hiking the EMI amounts.
Relief for Homebuyers with Floating Interest Rate Loans
Homebuyers who opted for floating interest rate home loans, linked to the external benchmark lending rate (EBLR) norms, have been affected by the rate hike. These borrowers have experienced an increase in their home loan interest rates from 6.75 percent in April 2022 to around 9.25 percent. The rate hike has resulted in lenders increasing the loan tenure or raising the EMI amounts for these borrowers. The repo rate status quo brings some relief to these borrowers, as they can now avail the benefit from the rate pause.
Outlook for Homebuyers and the Real Estate Industry
The unchanged repo rate of 6.5 percent provides favorable conditions for prospective homebuyers looking to avail home loans in the near future. Most banks are currently offering interest rates in single digits, ranging from 8.7 percent to 9.65 percent. The real estate industry has recorded a strong year, with housing sales in the first quarter of 2023 crossing the 1-lakh mark across the top 7 cities. The pause in the rate hike cycle further augments the industry’s ability to continue with new project plans, as buyer affordability remains favorable.
Impact of Inflation and Future Rate Hikes
The decline in India’s consumer price index (CPI) inflation to 4.25 percent in May is expected to lead to a further drop in home loan interest rates. The easing of inflation provides respite to both buyers and sellers. However, a future rate hike, if any, could push interest rates into double digits. The RBI Governor, Shaktikanta Das, mentioned that the Monetary Policy Committee (MPC) remains focused on withdrawing accommodation to align inflation with the target while supporting growth. Uncertainty remains as inflation is above target globally.
The RBI’s decision to maintain the repo rate at 6.5 percent brings relief to home loan borrowers, especially those with floating interest rate loans. The pause in the rate hike cycle provides a favorable environment for the housing sector and supports its continued growth. Prospective homebuyers can benefit from the unchanged rates and plan their finances accordingly. However, the possibility of future rate hikes and inflation levels should be considered when making long-term decisions in the real estate market.
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