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How Is The Interest Rate Hike Going To Affect Your Home Loans? Answers Andromeda

Andromedaloans.com is India's largest distributor of personal loan, home loan, business loan and loans against property

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The Reserve Bank of India recently increased the Repo rate by 0.40 percent, considering the ongoing inflation onslaught. Most of the financial pundits were signaling that a rate hike was on its way but not before June 2022. However, the Monetary Policy Committee took everyone by surprise citing various factors for the rate hike. The first is the Consumer Price Index (CPI) inflation at a 17-month high of 6.95 percent for March 2022, at the same time the Wholesale Price Index (WPI) inflation rose to a 4-month high of 14.55 percent compared to 7.89 percent in the previous year during the same period.

A rate hike after four years

Given the recent rise in interest rates, it is evident that the cost of availing of a loan is expected to grow even higher in the coming months. For most of the small ticket loans, the hike will play a crucial role in the overall cost of availing funds, but for the home loan, it is expected to drive the entire real-estate market towards growth after suffering stagnation for almost three years now. Before and during the Covid-19 pandemic, the cost of acquiring property was low, as the markets were flooded with unsold inventories and the buyer sentiment was poor, in order to net losses most builders sold the existing inventory without taking enough margins.


Global factors affecting real-estate

At a time when the global supply chain is disrupted due to the ongoing war and post-pandemic logistical issues, the prices of commodities like cement and steel have gone up by approx. 6-8% and the builders have no other option but to pass it on to the consumers which will be an additional cost to be borne. However, some major real-estate consultants suggested that it would boost the consumer sentiment even further as the property prices were not showing any signs of improvement before the pandemic, and with the availability of excess inventory, the rates were highly competitive. 

Key takeaways for Home loan borrowers

In the coming months, the central bank aims to curb inflation with subsequent rate hikes and is also putting a mechanism in place to absorb excess liquidity from the markets, especially from public & private banks. The annual wage growth in the country stands at around 10%, while inflation stands at around 7.00%. With the MCLR rates being hiked by selected banks, the realtors expect the borrowers to accommodate the inflated cost of inventory, which will eventually harm the overall Realty Price growth and will trouble the buyers to maintain a buying position. 

Let’s take an example to understand the impact of the rate hikes on a home loan EMI: 

Amount availed: Rs. 30 Lakh, for tenure of 10 &20 years, at the current rate of interest compared to how it would be one year down the lane and a fixed-rate loan for the entire repayment tenure:

Tenure 10 years:


New

After 1 year

Fixed

Loan Amount

INR 30,00,000

INR 30,00,000

INR 30,00,000

Interest Rate (pa)

7.10 percent

9.10 percent

8.20 percent

EMI

INR 34,987

INR 38,165

INR 36,716

Total Interest

INR 11,98,483

INR 15,79,834

INR 14,05,931


For a ten-year period in a Repo linked floating rate, a borrower will be spending Rs. 1,449 extra in EMIs and Rs. 1,73,903 in overall interest payment. The floating rates were more beneficial as long as the interest rates were kept at a bare minimum due to the pandemic.

Tenure 20 years:


New

After 1 year

Fixed

Loan Amount

INR 30,00,000

INR 30,00,000

INR 30,00,000

Interest Rate (pa)

7.10 percent

9.10 percent

7.50 percent

EMI

INR 23,439

INR 27,185

INR 25,468

Total Interest

INR 26,25,452

INR 35,24,405

INR 31,12,295


Now, considering a scenario where the repayment tenure is 20 years, the difference between a floating and the fixed-rate EMI comes to INR 1,717 and the interest payable would be INR 4,12,110 more than the other.

Fixed or Floating? Think wisely

As the interest rates are on an upward trend and there are no signs of any rate cut in the near future, both the first time home buyers & other home loan borrowers shall look forward to avail fixed rate loans instead of the floating ones to save a decent sum in EMIs & interest payments in the longer term. Once the inflation is back near normalcy, the borrowers can make use of the transfer facility to convert their fixed-rate into floating rate if the difference in rates is minimal and favorable to them.


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