India’s annual inflation rate reached as high as 7.79% as of April 2022. This level is the highest in about eight years and to curb this, the Reserve Bank of India (RBI) is undertaking several monetary policy measures. One such is increasing the repo rate by 40 basis points, making it 4.4 percent recently. Changes in the repo rate matter because they impact the interest rate at which lenders give out loans, such as home loans, to the public. Due to the increase in the repo rate by the RBI and anticipation of further rate hikes, several lenders have also raised their benchmark home loan interest rates. Let’s understand how this impacts you as a homebuyer.

  • While the final home loan interest rate you receive from the bank as a borrower depends on several factors from your end such as your credit score, income, etc., lenders also base their interest rates on external benchmark rates such as the repo rate.

  • The recent hike in the repo rate by RBI has triggered several private and public sector lenders to increase their interest rates. This is the first time in three years that lenders have increased their housing loan interest rates.

  • For new homebuyers, what this means essentially is an increase in the EMI due to an increase in the home loan rate.

  • Usually, in a rising interest rate environment, lenders tend to increase the tenure of the loans while keeping the Equated Monthly Instalment (EMI) the same so that existing borrowers’ monthly obligation does not increase.

  • However, with home loans, the tenures typically tend to be quite long to begin with and so increasing them further may not always be possible. Hence, in such a case, when the housing loan interest rate increases, lenders increase the EMI amount for existing home loan borrowers.

  • Higher EMI amounts could put a strain on your budget and make it difficult for you to pay your dues. Hence, it’s important that before you apply for a home loan, you use a home loan affordability calculator and an EMI calculator to determine how much home loan amount you should apply for depending on how comfortably you can pay the EMIs.

With the anticipation of inflation surging further and more repo rate hikes, you should carefully consider how that can impact your home loan. This is also why it’s important to weigh the pros and cons of floating interest rate vs a fixed interest rate plans when you apply for a home loan.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.