01 JULY, 2022

The Reserve Bank of India (RBI) had slashed the repo rate in March 2020 to help deal with the impact of COVID-19 and left it unchanged for almost two years but has now increased it twice since May 2022. First, the repo rate was increased by 40 basis points from 4% to 4.4% in the first week of May. Now, RBI has further increased the repo rate by 50 basis points to 4.9%.  

While RBI is taking these monetary policy steps to curb the soaring inflation in the country, increasing the repo rate has a direct impact on housing loan interest rates. As the repo rate increases, housing loan interest rates offered by lenders also surges. So, this second repo rate increase means that the housing loan interest rates that had already begun rising in May might further increase, making the cost of borrowing higher for you. So, should you buy a new house given these changes in rates? Here’s what experts have to say.  

Consider your 'why’ 

While changing interest rates impact the cost of buying a home and may play a role in your homebuying decision, ultimately you need to be clear of your ‘why’ - why do you want to buy a home? Buying a home and applying for a home loan are long-term commitments and not just financially. You have to consider if you and your family are ready to put your roots down in the city where you are looking to buy a home and what’s your motivation behind making this investment. While buying a home is a financial decision, it’s also often an emotional decision that tends to provide a sense of psychological safety.  

It’s important to weigh the pros and cons of renting versus buying given your current life stage, goals, and requirements. These factors tend to play a more important role in determining whether it’s the right time for you to buy a home or not.

 

Look at the EMI 

 

With the increasing home loan interest rates, it’s crucial to check if you can afford the home loan Equated Monthly Instalment (EMI). A home loan EMI is a long-term obligation and may take up a significant part of your monthly budget. Defaulting on your EMIs can have severe consequences and hence you should ensure to check whether you can comfortably pay off your EMI before you apply for a home loan. You can do this by using a home loan EMI calculator. This will help give you an idea of how you should financially plan when you want to take a home loan. Now, with the changing home loan interest rates, your home loan affordability may go down slightly than before. But it’s essential to stick to your affordability and not stretch your budget.


Assess other financial goals

 

According to experts, another thing you should consider is where you stand with your other financial goals. Firstly, do you have the required down payment for buying your home? Will your home loan EMI impact your other financial goals? Will the increased home loan interest rate derail you from your upcoming financial goals such as children’s education, purchase of other assets such as a vehicle, etc.?

 

Final words

 

As a first-time homebuyer, it’s essential to consider factors such as your home loan affordability, financial goals, life stage and needs, etc., rather than simply considering the changing housing loan interest rates. The thing is that your home loan tenure is going to be long – 15 to 20 years or more. Over this time, the repo rate and the home loan interest rate may go through changes several times. Hence, while it’s prudent to consider the current home loan interest rate and how it will impact you, in the bigger picture of things, this alone should not help you arrive at the important decision of whether you should buy a home now.

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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.