16 JUNE, 2022

COVID-19 infections have again started to rise in India, as various news publications have reported. If this continues, the country could experience another wave. As seen since 2020, the pandemic has had several economic impacts, including changes in housing loan interest rates. To know if home loan rates will be impacted due to another wave, let’s first understand how the rates are fixed.

How are housing loan interest rates determined?

The central bank of India, which is the Reserve Bank of India (RBI), regulates the cost of credit in the economy by making changes to its benchmark interest rate called the repo rate. The repo rate is the rate at which RBI lends to financial institutions and this rate acts as the benchmark for lenders to set their lending rate home loan interest rate is linked to external benchmark rate and repo rate is one of it. Any changes in repo will have direct impact on your home loan interest rate.

When the pandemic broke out in 2020 and the economy was hit, RBI sharply cut down the repo rate to 4%. This was done because the lockdown impacted businesses and the circular flow of income in the economy. This meant that the housing loan interest rates also decreased and were at an all-time low, making financing homes affordable for homebuyers.

Will another COVID-19 wave impact home loan rates?

For the last two years, the RBI did not change the repo rate until recently in May 2022 when RBI increased the repo rate by 40 basis points to 4.4%. Another COVID-19 wave may not compel RBI to slash the repo rate again because it's unlikely to be as severe as the previous waves, as many reports suggest.

Also, RBI uses the repo rate as a tool to regulate inflation. Currently, inflation in the country is surging. Hence, RBI is likely to increase the repo rate further in the future to make borrowing expensive in an attempt to curb inflation. Homebuyers can expect an increase in home loan rates as the pandemic is no longer going to mean all-time low interest rates.

What should you do as a homebuyer?

With the housing loan interest rates rising, you should ensure that before you apply for a home loan, you figure out your home loan affordability and have a solid loan repayment plan in place. To determine what Equated Monthly Instalment (EMI) amount you will be comfortable paying regularly, you can use an online home loan EMI calculator. This will help you get estimates of not just your EMI obligation but your total interest outgo, which will give you a clearer picture of your total cost of buying a home.

You should also consider the differences between a fixed interest rate and a floating interest rate before you apply for a home loan. For instance, home loan borrowers with fixed interest rates don’t have to bother about the current rising interest rate environment. However, two years ago when the interest rates were slashed, they missed out on that benefit too. Hence, remember to weigh the pros and cons of the type of housing loan interest rate, use the home loan EMI calculator, and budget carefully when applying 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.