For home loan borrowers who availed loans in the last two years, experts say that the impact will be serious.
The increase in the cost of borrowing has not prevented people from securing their dream homes by availing housing loans from banks. Despite the increase in interest rate and the Equated Monthly Installments (EMIs) on home loans, Financial Year (FY) 23 saw a higher growth rate of home loans availed than the growth rate of FY 22.
Data shows that the percentage growth of housing loans from March 2022 – January 2023 was 12.1 percent, compared to 9.6 percent on March 2021 – January 2022. This comes against the backdrop of the multiple repo rate hikes by the Reserve Bank of India (RBI). Since May 2022, the RBI has increased the rate by 250 basis points (2.5 percent).
President and Chief Operating Officer (COO) of Karur Vysya Bank, Natarajan Jagannathan, said “The interest rate is not the primary motivator for the people to buy a home. Particularly, those who are buying for the first time.” He added that, unlike automobile loans, home loans are taken at a floating price, which might also play a positive role when rates fall.
Reports show that for a 20-year home loan of Rs. 70 lakhs at seven percent interest availed in May 2022, a 250 basis points (bps) rate hike, will make the borrower pay an additional amount of Rs, 10,978. With the same 250 bps hike, the report shows that tenure will go up from 180 months to 270 months for a loan of Rs. 50 lakhs at seven percent interest, if the borrower opts to increase their tenure. The interest for availing housing loans has risen by an average of two percent since last year.
This increase in the repo rates has been passed on to the customers, but is not uniform across all banks, said Sankhanath Bandyopadhyay, an economist with a credit rating agency. The borrowers have two options to deal with the rising rates, Bandyopadhyay said. a “Either they can pay higher EMI, or increase the tenure of payments,” he added while stressing that the impact of raising rates will only be seen after some time
Natarajan said that banks usually give loans on the longest tenure possible, and will adjust the EMIs accordingly if there is a rate hike. He said that, “If there is a rise in interest rate, we normally do not touch the EMI component, as we adjust it by increasing the tenure.”
Natarajan, also said that for those who availed of loans in the last two years, the impact will be serious. “Home loans are for very long periods, and there will be at least three or four rate cycles, either upward or downward,” he added and explained that the correct rate increase cannot be estimated without many factors.
Githish Prassana, 30, availed a housing loan of Rs. 29 lakhs at the Bank of Baroda in 2021. He was under obligation to pay an interest of 7.5 percent for 15 years. But he said that he was distressed that he had to opt for higher tenure. “I extended my tenure because I could not suddenly pay higher interest.” He added that this has been painful, but he expects the interest rates to fall in the future.
The reasoning behind the increase in the repo rates by the RBI is to bring down the inflation level, by curbing the liquidity in the system. Therefore, when RBI raises the repo rates for the banks, it is passed on to the borrowers, making it costlier.
However, the growth in housing loans is not significant in percentage to conclude that the growth is consistent, said, Karthik Sambandham, Chartered Financial Analyst (CFA). “It is too soon and instantly we cannot see the effects. We have to wait to see the recent and next quarter to see what are the growth and forecast,” he added.
The same report highlights the fall in the loans availed by the Micro, Small, and Medium Enterprises (MSME). . The fall in the percentage increase in the credit for the Micro and small industries was around seven percent, and for the Medium industries, it was by around 33 percent.
Although the rate hikes have affected the interest rates of housing loans, Karthik said that the RBI never said they wanted to discourage people from taking a house loan. “The major loan book for a bank is from businesses, and that has reduced drastically, which is usually where RBI had an idea to reduce,” he said.
Bandyopadhyay said that this spree of availing housing loans can be attributed to the pent-up demand that existed during the COVID pandemic, and the improving economic scenario. “People postponed the spending decision during the pandemic and with a positive economic outlook, they might have decided to take a home loan,” he said. When there is a need to pay an additional amount because of the hike in interest rates, people cut down other expenditures to adjust their budget, he said.
Natarajan also said that this increasing interest rate will not lead to a surge in the Non-Performing Assets (NPA) in the housing loan sector. “Since the EMI will continue to be the same, and through increasing the tenure, there is no cash flow pressure for the borrower. Hence, it will not raise any NPA concerns,” he said.
