RBI action: Brace up for a hike in your home loan rate

Written by Sandeep Singh | New Delhi | Updated: Sep 23 2013, 13:37pm hrs
Home loan burdernThere is no clarity on when the interest rates may start coming down and when home and car buyers can breathe easy.
The Reserve Bank of India on Friday surprised the market with a 25 basis points hike in the repo rate at which the RBI lends to commercial banks in its effort to tame the inflation which breached the 6 per cent mark to reach a six month high of 6.1 per cent in August. While the RBI Governor made it clear that repo rate would be the effective policy rate and would be consistent with the inflationary environment, there is no clarity on when the interest rates may start coming down and when home and car buyers can breathe easy.

The tone of the RBI seems more inclined towards fighting inflation than going for growth and since there are expectations that inflation is likely to remain higher on account of a likely hike in fuel prices, it raises some concern for existing and prospective home loan customers, and prospective car owners.

The State Bank of India raised its base rate by 10 basis points thereby raising its lending rate and also raised the interest offering on deposits by 0.25-1 percentage point across various maturities. The banks action came a day before the central bank was to announce its monetary policy.

Leading housing finance company HDFC too did not deny a hike in interest rates going forward. We will wait and watch for the next few days on how the rates move and will take a call on the same, said Keki Mistry, vice chairman and CEO, HDFC. He, however, added that he does not expect more repo rate hikes this fiscal and expects a correction in rates in the latter part of this fiscal.

There are others who feel that the tight liquidity environment will continue and lending rates will also firm up. Liquidity will continue to remain tight and while lending rates are already very high, they will continue to remain high, said Gagan Banga, CEO, Indiabulls Financial Services.

Home buyers and existing home loan customers may therefore brace up for a hike in rates by their bank or housing finance company as they may not be very far from raising their rates. Some feel that a hike in repo rates have added pressure on lending rates though not immediately.

Clearly the cost of funds have been moving up in tandem with all the other macroeconomic factors that we are seeing around us. The current global and domestic macro economic scenario is critical. It is premature to assume that interest rates will go up immediately, said Kapil Wadhawan, CMD, DHFL.

For an existing customer, if your floating rate loan at 10.5 per cent has a total outstanding of Rs 20 lakh for 18 years (216 months) then as a result of a hike of 25 basis points, the tenure of your loan will rise by 11 months to 227 months, keeping the EMI constant.

It may be prudent to liquidate some savings (fixed deposits etc) and partly prepay the home loans so as to reduce the impact of any hike in interest rate.

For a new customer, the EMI for a Rs 20 lakh, 20 year floating rate loan if the rates rise from 10.5 to 10.75 per cent, the EMI will go up from Rs 19,967 to Rs 20,304.

At a time when the real estate market is under pressure and prices across cities are softening, home buyers will have to be careful about one more aspect nowwhich way are the interest rates headed and what should be their approach while buying a home.

Real estate experts call for home buyers to be very prudent as of now. They suggest buyers to go for hard bargain along with going only for projects of credible developers at good locations. It is important to go with a developer that has the financial ability to deliver the project at this time when the industry is facing financial stress.

Industry insiders say that RBIs move to raise the rates will further dampen investor sentiment and may slow the market. The burden of inflated EMIs may deter buyer sentiments in the upcoming festive season too, perhaps prolonging the demand stasis in the real estate sector, said Anshuman Magazine, CMD, CBRE South Asia.

But home buyers are not the only one to see the stress. Car buyers will also see their cost of purchasing a car going up. Several car manufacturers have already raised the prices of their cars by up to 5 per cent as their import costs have gone up on account of the depreciation in the rupee.

A hike in interest rates will only raise their cost of owning a car and therefore prospective car buyers may look to reduce their loan component by increasing their own contribution.