Home Loans - Burden or Boon

Updated on Sept. 4, 2022, 2:29 p.m.

Home loan interest rate refers to the amount charged on the principal by a home loan service provider to a customer for using the principal amount. Your house loan interest rate will judge the monthly payable EMI against your home loan.

The Indian middle class is having stormy times due to two reasons namely increase in the prices of the essential commodities and due to the increase in the home loan rates. The major news getting circulated in the financial world is the interest on the home loan is set to again increase with the RBI increasing the repo rate by 50 basis points to 5.4 percent.

During the Pandemic in 2020 the rate of interest reduced and the EMI also got reduced and the state government reduced the stamp duty charges.  This encouraged the home makers to loosen the purse and purchase a beautiful house, those willing to purchase the 1 BHK opted to purchase a 1.5 BHK house and upgrading their purchasing abilities and so on.

However, the trend is changing in 2022 as the interest rate is very high and cost of raw materials have increased driving the prices of property to great heights. Due to this reason, the home makers began to feel the pinch and the affordable and mid segment houses will see a tremendous drop in the coming years to come.

The rate of interest is affecting the confidence of the potential house buyers in India.

The policy by the RBI to enhance the Repo rates of the Home Loans has created a big hole in the hearts, minds and the wallet of the people. The cost of the houses in India up till INR 70 Lakhs will be the most affected and the cost of the houses in India beginning from INR 80 Lakhs to 3 Crores will be the least affected in the current scenario. Buyers purchasing in the second category of the houses will be least bothered, as they are from the affluent class. However, the buyers from the first category will feel the pressure of paying the EMI on the home loans.

According to the real estate experts, the ultimate class winning the deal of purchasing the houses in India will be the NRI (Non-Resident Indians) who are making a beeline for purchasing branded and non-branded luxurious real estates in India.

Real Estate Market is Bullish

Most of the real estate segment has witnessed a tremendous growth in the last 1 year, thanks to the festivals like Ugadi, Dan Teras, Onam, Vara Mahalakshi Pooja, Ganesha Chaturthi and people are getting attractive offers from the developers and builders to purchase the Villas, Independent Houses, Dupleix, 2 or 3 BHK Flats, Condominiums and other on a regular basis.

When the ownership of houses becomes attractive people love to purchase the house with monthly instalments rather than paying the monthly rentals. The launching of the Work from Home (WFH) has impacted the entry of people into the real estate segments as, people refused to purchase the new house or take up houses on rental basis in India.

Due to the onslaught of the pandemic and remote working scenarios, the people will defer the purchase of the house to some months or years till they are in a comfortable position to buy the houses.

Another important factor is the increase in the inflation dancing between 6 to 7% in India, the salaried class of employees must receive an increment along with promotion to at least 6 or 7% to manage their EMI (Easy Monthly Instalment) and purchase the houses. Due to the increase in the rate of interest announced by the RBI, there will be a great reduction in the supply of houses and launch of the new projects in India.  This will further impact the supply of raw materials and lead to drop in the expenses leading to stagnation in the real estate segments in India.

Reasons for Increase in Home Loan Interest Rates

  • Inflation rose to 6% and hence to slow the rate you will need to enhance the rate of interest.
  • Finance industry is very sensitive in nature, Covid and the Russia Ukraine conflicts has further fuelled the loan rates.
  • The employment scenario is not that good, and this also fuelled the rise of Home Loan rates.

Fixed Vs Floating Interest Rates

The interest rates on the Home Loans are going to be very high in the coming years and since it is not showing any signs of reducing, the existing home loan customers can transfer their floating home loan rates to the fixed home loan rates.

According to the real estate experts the transferring of the home loan a borrower can save huge amount in the form of the Easy Monthly Instalments and payment of interest in the coming years. Later when the inflation reduces, you can again convert the fixed rate loans to the floating rate loan as per your comfort zones.

Tips for Home Loan buyers

At this juncture the borrower must look forward to extend the loan duration, rather than enhancing the EMI. The borrower can do this or allow the bank to do this task immediately as well.

Let us consider a situation, where in suppose the borrower has taken INR 50 Lakh as a loan at 7.55% interest per annum for a period of 26 years. The EMI will be INR 37000 and after the increase of the repo rate done by the Reserve Bank of India, it will definitely go up to INR 38000 and at this situation the amount that will be paid by the borrower will come to an extra of 1600 per month, meaning he/she will make payment of INR 38000. The increase in the repo rate will cost that person INR 4 Lakhs.

Various factors will play a vital role in switching from floating to fixed interest rates in home loan scenario. If you want budgeting and peace of mind, then the fixed loan rates are very easier and the EMI will not go up even if the rate of interest rises. At this situation the best option will be to repay the bigger loans first and clear it and move forward with the smaller loans in the present scenario.

To be honest, the rate of interest has to be brought down by the RBI to encourage the people to go in for the home loans and purchase the house of their dreams in India.

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