To pacify inflationary pressures and handle the current and evolving macroeconomic situation, the Reserve Bank of India (RBI) Monetary Policy Committee (MPC), at its meeting today, decided to increase the policy repo rate by 50 basis points to 5.90 per cent. Banks will also increase interest rates on term loans such as home loans, personal loans, education loans, and auto loans, among others. All loans on flexible interest rates will now be costly affairs for borrowers.
This is the fourth straight hike by the RBI to control the rising inflation in the country and bring back the economy on track.
The apex bank first raised the repo rate by 40 basis points in May and further by 50 basis points in June. Another hike of 50 basis points in August took the total hike to 140 basis points in the policy repo rate. The latest hike of 50 basis points will increase the home loan interest rates for both the existing and prospective buyers who plan to buy a house in the next couple of months. Though the rise in the repo rate was expected due to high inflation and other factors, this move will likely impact the affordable housing segment.
Adhil Shetty, CEO, Bankbazaar.com, says, “The 50-basis point hike makes it the fourth straight raise since May 2022. The hikes have been necessitated by factors such as inflationary pressures, the Ukraine conflict, and microeconomic uncertainties in large economies. Since May, the repo rate has increased by 190 basis points. The latest hike in repo rates will make funding costlier for existing and new borrowers. For existing borrowers, all home, car, personal, and education loans on floating rates will become more expensive. New borrowers will have to take loans at a higher price compared to last week.”
“At a time like this, it is advisable to pre-pay in any shape and form to control your interest outflow. You could cut down non-essential expenses to save money for pre-payments. With pre-payment, borrowers may feel the pinch in the short term, but they will be better off once the rate cycle reverses,” adds Shetty.
Since real estate is a sentiment-driven sector, the hike might dampen the spirit of home buyers in the short term. However, many banks offer lucrative discounts during festive seasons to lure home buyers. These offers may include lower interest rates, waiving off processing fees, additional charges, etc. If your credit score and repayment records are clean, you can negotiate a good deal while taking a home loan.
Buyers will likely feel the pinch due to back-to-back hikes in repo rates. They must prepare to pay a higher amount of EMIs as most banks have already announced a hike in their interest rates. Currently, the RBI is entirely focused on taming the rising inflation, which stays above 6% for the sixth consecutive month. The latest rate hike was expected, but home loans will now become more expensive for borrowers.
Every time the RBI announces a hike in the repo rates, it gets expensive for banks to borrow money from the apex bank. Banks also have to pay interest like borrowers to borrow money; as the cost of funding has increased now, the borrowers will have to find ways to cut down their non-essential expenses to handle the rise in EMIs.
Home buyers must now prepare for higher interest rates as funding has become costly as inflation is here to stay. It may pinch you in the short term, but if you prepare carefully, you can still manage to buy a house even during these times when the home loan rates are high. You can buy a house when you are financially ready for it. Prepare your budget and search your options. Compare the home loan interest rates, and if your financial records are intact, you can take your buying decision basis your requirements.
Though the rate hike won’t affect the luxury housing segment, where the demand for buying big-ticket homes saw some movements, especially in markets like Mumbai. Also, home buyers are now more prepared than before. With the rising salary due to increments and jobs, these changes will give young home buyers some confidence to take the plunge.
As home loan EMIs are getting costlier, buyers must avoid non-essential expenses and pay attention to increasing their savings. Create emergency funds and borrow only as much as required to meet your expectations. Pay your credit card bills and home loan EMIs on time without delay and defaults, and continue to diversify your investment to handle the rising inflation and home loan interest rates. Existing borrowers can either partially prepay or fully repay their home loans, if possible, to avoid paying higher interest rates or increased tenure. Those facing difficulties paying higher amounts EMIs can choose longer tenures, but the overall interest rates will rise in this case. You must factor in your circumstances and decide based on what suits your situation the best.
