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Hiking Home Loan Rates And Its Impact On The Indian Real Estate Market

  • Author: Melby Anna Stephen
  • 5 min read
  • June 15, 2022
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home loan interest impact on real estate

Almost all banks and HFCs have raised their lending rates in recent weeks, from SBI to HDFC Ltd, and from PNB to LIC Housing Finance, which does not appear to be a healthy move for the housing market.

When it comes to purchasing a property, the most important consideration is money. People in India used to save their entire lives to buy a home in India after their professions. As a result, despite most of their adolescence being spent in leased housing, they did not have to worry about a bank debt. The present generation relies significantly on bank loans to realize their childhood goals of owning a property. Naturally, the loan is a source of concern, since several elements influence the rate of change in your house loan.

Also Read: Falling Home Loan Interest Rate and Its Impact on Real Estate Investors

Real estate is in high demand

Approximately 90% of homes are financed in part using bank loans. Taking out a loan gets more expensive when interest rates are high. As a result, there would be less demand for real estate. Buyers looking to buy a property with cash, on the other hand, may benefit from this. However, such customers are few.

1. Impact on the construction industry:

Higher interest rates would make loans to real estate businesses more expensive as well. A lot of real estate businesses are in debt, and an increase in bank loans would not only add to their load but would also influence future project launches.

Following an off-cycle repo rate rise by the RBI in May, banks and housing finance businesses have recently raised home loan interest rates, which comes at a time when the real estate market is just starting to gather up steam after a couple of years.

2. Impact on homeowners:

If interest rates rise, homeowners who are currently paying equated monthly installments (EMIs) would be taxed even more, especially if their loans are based on a variable interest rate. If the interest rate cycle continues to trend higher for an extended period, the property will become considerably more expensive than it was designed to be.

Also Read: Practical Real Estate Tips For First Time Home Buyers In 2022

How will the higher interest rate affect the residential real estate sector?

Almost all banks and HFCs have raised their lending rates in recent weeks, from SBI to HDFC Ltd, and from PNB to LIC Housing Finance, which does not appear to be a good move for the housing sector because it will ultimately affect the overall acquisition cost for homebuyers and may dampen residential sales to some extent. According to industry analysts, a 1% increase in the interest rate on a home loan affects house purchase affordability by 7.4%.

Also Read: Increasing demand for Luxurious Homes in Indian Market

According to analysts, even if the increase in house loan interest rates was minor, it would function as a psychological barrier for purchasers at a time when the real estate market was just beginning to perk up. It would depress the buyer’s spirit, especially for those shopping for homes in the cheap category, when combined with rising input costs, which had caused developers to raise property prices to some extent.

The fear is palpable in the real estate sector, which has struggled with lackluster sales in recent years.

The hike in interest rates by banks, according to experts, could not have come at a worse moment. With purchasers trying to shake off the pandemic’s negative vibes and take advantage of historically cheap housing costs as well as historically low home loan interest rates, the banks’ decision would undoubtedly affect buyer attitudes. It will also have an impact on the real estate industry, which had begun to pick up steam after a two-to-three-year hiatus and is, among other things, one of the greatest job creators.

Most importantly, it signifies the end of the low-interest-rate era for house loans. The rate hike has arrived at an inopportune moment. However, this also signals a sense of stability, since the end of cheap lending rates will focus the attention of serious purchasers. Some real estate developers believe that the current wave of interest rate rises might have been postponed for a while.

Bank interest rate rises were an inevitable conclusion, especially after the RBI lifted base rates. The banks, on the other hand, had waited a few months for this set of raises. At the very least, it might have awaited for the property market to pass on the benefits of lower gasoline costs and lower iron prices (due to an increase in export tariff) to clients. The shift will have an impact on the business and retail sectors as well. According to a few developers, the recent wave of raises may cause purchasers to be concerned, and they should wait and see for a little more.

Banks’ recent hikes in house loan interest rates will undoubtedly convince home purchasers that interest rates will only continue to rise. Contrary to common belief, any such rise will have a significant impact on the high-ticket luxury market, which entails large sums of money, resulting in increased EMIs and interest rates. Furthermore, because one of the banks hiked its RPLR three times in a month, the action will add to the uncertainty about the magnitude of future rises. But real estate investments will still fetch you big returns, especially commercial real estate. Assetmonk is India’s fastest-growing wealthtech platform focused on commercial real estat investments. Making high-ticket size assets accessible to retail investors via fractional ownership, you can choose from assets in top Indian metros with IRRs of IRR of 14 to 21%.

FAQ’S On Home Loan Rates

Q1. What effect will lower interest rates have on the housing market?

Mortgage rates are lower when they are lower, making house ownership more accessible. As a result, house sales are increasing as more people can obtain a low-cost loan.

Q2. Will rising interest rates slow the housing market?

Experts agree that rising interest rates will have an impact on the housing market, albeit the extent of that impact and when it will be realized is unknown.

Q3. Does repo rate affect home loans?

Since the repo rate is transmitted instantly, the influence on the home loan interest rate is seen within three months. When the repo rates increase, the repo rate-linked rate of interest (RLLR) climbs with it, increasing the borrower’s home loan interest rate.

Q4. What happens to my home loan if interest rates rise?

Interest rates tend to rise in tandem with economic growth when the economy is robust. However, rising interest rates imply greater mortgage loan expenses. As interest rates rise, residences become more expensive for purchasers, limiting demand for home purchases.

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