How The Hike In Home Loan Rates Will Impact Home Loan Market

8 mins read

Buying a home is not an easy task and most people opt for a home loan to finance their dream. However, since availing of a home loan is a huge financial responsibility, applicants must be careful and know about all the pros and cons of a home loan before finalizing their decision. Further, they must also know that any increase or decrease in the SLR by the central bank rate impacts the housing loan interest rates and home loan eligibility. This, in turn, also affects the demand for the home loan market. 

What is the Impact of Higher Interest Rates?

Around 90% of homes are financed using housing loans from banks. Availing of a loan gets more expensive when interest rates are high. This leads to a fall in real estate demand. The RBI’s decision to raise the benchmark lending rate by 50 basis points to 5.40 percent will make home loans costlier, thus reducing the affordability for prospective homebuyers. Let us discuss the impact of rising home loan interest rates in detail.

  1. Impact of Higher Interest Rates on the Construction Industry

Many real estate businesses are already in debt due to the fall in demand they faced during COVID. Now an increase in bank loans would not only add to their load but would also influence the launch of their future projects. Post COVID, the real estate market was recovering. However, recent increases in the REPO rate by the RBI in the last few months has become a cause for concern for the real estate businesses. The repo rate hikes will lead to an increase in the housing loan interest rates, which is not a good sign for the real estate businesses. 

  1. Impact of Higher Interest Rates on Homeowners

With the increase in interest rates, homeowners who are currently paying a certain amount of EMIs for their home loans would be affected as this will lead to a rise in their EMIs. If the interest rate continues to rise for an extended period, then their property will become more expensive than it was originally designed to be. All the buyers who were thinking of availing a home loan to buy a home may now think otherwise as the increase in the housing loan interest rates may deter them from doing so. This will also negatively impact the home loan market.

How Will the Increase in Interest Rates Affect the Home Loan Market?

  • Less Buyers Will opt for Home Loans – With the increase in the housing loan interest rates, buyers will find home loans a burden and refrain from availing them unless absolutely necessary. They will postpone buying homes to refrain from paying increased EMI rates.
  • More Prepayments – The home loan market will see more prepayments by customers to minimize hiked interest rates on their existing EMI. They will do their best to wrap up the loan to save on this. The loan prepayment calculator can help them see how much they can save by prepayment.
  • Home Loan Tenor will Increase – Borrowers of home loans will increase their home loan tenor so that the EMI remains the same for them and does not add to their monthly expenses. 
  • Increase in Balance Transfer of Home Loan – Due to the increase in the housing loan interest rates, more borrowers having a long tenor of home loan pending will do a balance transfer for lower interest rates for a longer tenor. Visit the Bajaj home loan login page for more information on this.
  • Increase in other charges – While applying for a home loan one takes into account other charges, such as processing fees and prepayment charges. If the property is new and is priced highly, the stamp duty charges will increase. 

Impact of Higher Interest Rate on the Residential Real Estate Sector?

Almost all banks and HFCs have raised their lending rates in the last few months, which does not seem to be a good move for the housing sector as it will ultimately affect the purchasing cost for homebuyers and this may dampen the sale of residential properties. Some analysts say even a 1% increase in the interest rate on a home loan affects home purchase affordability by 7.4%. Thus, even a minor increase in house loan interest rates would cause a psychological barrier for purchasers while availing of a home loan. With rising material costs causing developers to raise property prices, high interest rates will dissuade the buyers further.

Due to the poor sales in recent years the real estate sector is in fear of a fall in terms of sales again due to this increase. While some analysts think home loan borrowing is at a flexible rate, a short-term interest rate hike will hurt the homebuyers’ sentiments, but in the long run, it will average out the cost of home loans.

Experts also opine that this increase has come at a worse moment. The central bank’s hike in SLR rate and REPO rate will affect the home buyers who were just coming out of the negative space regarding the home purchase and taking advantage of the really cheap housing costs and home loan interest rates. This will affect the real estate industry which was just getting back to its feet after the lull experienced during COVID.

Summing Up

Thus, with the hike in the home loan interest rates due to the increase in the rates by RBI, the home loan market is going to get affected. Buyers will lose interest in buying homes and opting for home loans as they will become more expensive. The monthly EMIs on home loans will become unaffordable for many and this will not be a good sign for the home loan market. But, some analysts believe this situation will last only for a short while and even out in the long run.

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