Rising interest rates on home loans impact buyer affordability. Knight Frank India in a recent note discussed how rising interest rates impact homebuyer affordability. The note provides details on the impact of the increase in home loans in terms of 50, 100, 150 basis points and the respective increase in the amount of the EMI and decrease in the levels of the index. accessibility.
The 50 basis point hike in the repo rate announced in June by the Monetary Policy Committee (MPC) follows a 40 basis point increase in May. In addition, the significant 1 percentage point increase in the consumer inflation estimate for FY23 to 6.7%, which is above the RBI’s upper 6% tolerance band, also suggests that further rate hikes are likely.
The RBI is expected to continue raising the policy rate to narrow the gap between consumer inflation and the repo rate and reduce the magnitude of the negative real interest rate in the economy which is still at -1 .8%.
Although home loan interest rates are still well below pre-pandemic levels, it is useful to assess the impact of each home loan rate increase on the EMI load and eventual affordability levels. end consumers.
Impact of increasing home loans on EMI and affordability
Source: Knight Frank Research
Note: Affordability and income levels are calculated holding all variables constant except interest rate.
Home loan rates are still around 150 basis points lower than in 2019 and a return to these levels will result in an 11.73% increase in the EMI charge for the homebuyer and an effective decrease in 3.38% of the accessibility base of the Knight Frank Accessibility Index.
This analysis does not take into account changes in income levels or house prices and considers interest rates as the only variable. House price levels have increased over the past 12 months in most markets and are also expected to have a significant impact on affordability.
Average for Bangalore
Although, based on the home loan terms of individual buyers, lenders’ response measures will vary, the increase in the repo rate earlier in May and now in June will make EMIs more costly for buyers. With the increase in the interest rate for home loans in May and now in June, EMIs have increased for the borrower. For example, assuming full pass-through of the repo rate increase, for a home buyer in Bengaluru with a home loan of Rs 75 lacs, the EMI rose from Rs 59,962 per month before the rate hike. rate at Rs 61,803 in May and now Rs 64,141 in June.
Average for the NCR
Although, based on the home loan terms of individual buyers, lenders’ response measures will vary, the increase in the repo rate earlier in May and now in June will make EMIs more costly for buyers. With the increase in the interest rate for home loans in May and now in June, EMIs have increased for the borrower. For example, assuming full pass-through of the repo rate increase, for a homebuyer in the NCR with a home loan of Rs 1 crore, the EMI rose from Rs 79,949 per month before the increase rates at Rs 82,404 in May and now Rs 85,521 in June.
Average for Mumbai
Although, based on the home loan terms of individual buyers, lenders’ response measures will vary, the increase in the repo rate earlier in May and now in June will make EMIs more costly for buyers. For example, assuming full pass-through of the repo rate increase, for a homebuyer in Mumbai with a home loan of Rs 2 crore, the EMI rose from Rs 159,898 per month before the rate hike. rate at Rs 164,807 in May and now Rs 171,041 in June.
Concretely, the increase in mortgage rates generally translates into an increase in the tenure rather than an actual increase in the EMI, thus mitigating its impact to some extent.