The Reserve Bank of India’s (RBI’s) decision to keep the repo rate unchanged at 6.5 per cent has brought cheers to home loan borrowers. This is the second instance when the central bank paused the rate hike, signalling interest rates are stabilising. For an existing home loan, a pause in repo rate will not impact equated monthly instalments (EMIs), but if someone has a floating rate loan, they can avail the benefit from the rate pause. However, the best for the home loan borrowers is yet to come when the regulator will start cutting the rate.
The real estate sector also hails the RBI’s rate pause decision. According to analysts, the call to maintain the rate at 6.5 per cent is a positive development that will support the housing sector’s continued growth. To combat surging inflation, the RBI since May 2022 has increased the repo rate by 250 basis points (bps).
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What Is Repo Rate?
Repo rate means Repurchasing Option rate. It is the rate at which the central bank lends money to commercial banks. Any changes in the repo rate impact financial instruments, including home loans.
External Benchmark Lending Rate
Homebuyers who were paying a loan interest rate of 6.75 per cent in April 2022 are now paying around 9.25 per cent as per the external benchmark lending rate (EBLR) norms. This means that those who had opted for a floating interest rate home loan, which is linked to the external benchmark, had borne the brunt of the 2.5 per cent rate hike up until February 2023, as their home loan interests went up in tandem with the repo rate hike. This resulted in lenders increasing the tenure of the loan and when that wasn’t feasible, banks hiked the EMI amount.
In the past one year, a rate hike of 2.5 per cent denotes that the EMIs for borrowers have gone up by almost 16 per cent in case of a 15-year loan, 20 per cent for a 20-year loan, and 26.5 per cent for a 30-year loan.
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Home Loan Interest Rates Still In Single Digits
Anuj Puri, chairman of ANAROCK Group, told ABP Live that the decision to keep the repo rates unchanged at 6.5 per cent was on expected lines. “This gives some respite to prospective homebuyers looking to avail of home loans in the near future. The unchanged repo rate can help maintain the momentum in housing sales, which has so far been firing on all cylinders in 2023.”
According to ANAROCK Research, housing sales in the first quarter of 2023 has been scaling new heights, breaching the 1-lakh mark at 1.14 lakh units across the top 7 cities.
“Given the current unchanged rates, the outlook for those looking to buy their first home via a home loan soon remains favourable. Interest rates from most banks will continue in single digits. With top banks, they currently hover between 8.7 per cent and 9.65 per cent,” Puri said. However, he cautioned that a future rate hike, if any, might push the rates into double digits. “The persisting financial instabilities in advanced economies of the world may have repercussions in India, causing the RBI to take such a step to face these headwinds.”
RBI Governor Shaktikanta Das in his policy statement mentioned that the MPC decided by a majority of 5 out of 6 members to remain focused on withdrawal of accommodation ensuring inflation progressively aligns with the target while supporting growth. Das said the pace of monetary tightening has slowed down but uncertainty still remains as inflation is above target across the world.
Highlighting key reasons for buying a home in the face of challenges, Vivek Rathi, director research at Knight Frank India, said: “Despite the 2 per cent to 2.5 per cent increase in home loan interest rate that reduces the house purchase affordability by close to 15 per cent and should be considered as a real pressure, buyers continued to take the plunge knowing very well that home buying is a long-term decision. They are prepared to handle their financial obligations. Besides, moderately increasing house prices also positively influenced buyer behaviour in favour of home buying.” A pause in the repo rate provides further clarity to homebuyers to plan their finances towards a house purchase decision, he said.
The real estate industry has recorded a strong year in FY23 and this pause in rate hike cycle further augments their ability to continue with new project plans as buyer affordability remains favourable, Rathi noted.
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Ease In Inflation
Given the decline in India’s consumer price index (CPI) inflation to 4.25 per cent in May, home loan interest rates are likely to drop further. The retail inflation numbers in May hit a 25-month low and came under RBI’s upper tolerance band of 6 per cent for the third straight month, giving the much-needed respite, both to the buyers and sellers.
Sourabh Bansal, managing director at Magicrete Building Solutions, sounded positive while saying the repo rate status quo by the RBI is a good sign for the housing sector. Despite the repo rate increasing by over 2 per cent in the past two years, the real estate sector saw a record sale of 1,13,000 houses in the last quarter (Q4FY23), which is a 14 per cent jump over the previous quarter, he said.
“The pause in the repo rate, coupled with a gradual easing of record-high inflation, creates a favourable environment for the housing sector. The RBI is promoting stability and ensuring that borrowing costs for homebuyers remain within the range,” he opined.
Data released by the Ministry of Statistics and Programme Implementation on June 12 showed retail inflation for housing stood at 4.84 per cent in May, up only 0.2 per cent from April’s inflation print.
Bansal indicated that housing rates might start reducing in the next few quarters and could go back to the bottom levels of 7 per cent like 2021. “At this magic number of 7 per cent home loan rate, the housing price appreciation and rental yields together tend to be higher than home loan rates, thus triggering a boost in demand for housing. Additionally, the sustained growth in the construction sector despite previous rate hikes indicates that market forces and other factors such as government initiatives and favourable policies are playing a significant role in the sector’s success.” he said.
