In its bi-monthly monetary policy review on Thursday, the Reserve Bank of India (RBI) decided to keep the repo rate unchanged at 6.50 per cent. After raising the repo rate by 250 basis points since May last year to bring inflation within its tolerance limit, the RBI has pressed the pause button on the repo rate hikes to check the progress the central bank has made so far, sending positive sentiments to the real estate industry and homebuyers.

The recent interest rate hikes had impacted the sentiment of homebuyers who were waiting for the central bank to hit a pause button before they could decide to borrow home loans. Owing to back-to-back interest rate hikes, the existing home loan borrowers are already reeling under pressure as their loan tenures have gone up significantly. In fact, EMIs have increased for many, and they are now exploring options to refinance or partially repay their loan to bring down this financial burden.

Adhil Shetty, CEO, Bankbazaar.com, says, “After raising the repo rate by 250 basis points since May last year to bring inflation within its tolerance limit, the RBI has pressed the pause button on the repo rate hike to check the progress the central bank has made so far, sending positive sentiments across sectors. Homeowners will meet this announcement with a sigh of relief since they were reeling under the pressure of lengthening loan tenors and rising interest rates. More importantly, inflation has softened though it remains higher than the RBI’s tolerance level. It’s expected inflation will continue to soften.”

According to a recent report, the housing demand has declined in affordable markets owing to rising interest rates as buyers are now waiting for rationalisation borrowing costs. If the reports are to be believed, the US FED will be announcing its last rate hike and the same was being expected in India. Many believed that this will be the last repo rate hike. However, the RBI pressed the pause button on the interest rate hike, giving some relief to homebuyers.

Also Read: Home Loan – Smart ways to manage a longer tenure loan

Whatever be the case, let us understand how the repo rate hike influences the sentiment of homebuyers.

Repo rate is the interest rate at which the RBI lends money to commercial banks. When the repo rate increases, it leads to an increase in the borrowing costs for commercial banks. This, in turn, affects the interest rates offered by banks on loans, including home loans. Therefore, an increase in the repo rate generally leads to an increase in the cost of borrowing for homebuyers in India.

Here’s how increasing repo rates impact home buyers:

Increased EMIs: Home buyers who have taken a floating interest rate home loan see an increase in their EMIs (equated monthly installments) if the repo rate is increased. This means they have to pay a higher amount each month towards their home loan.

Reduced affordability: An increase in home loan interest rates due to a repo rate hike may lead to reduced affordability for potential home buyers. Higher interest rates lead to higher EMIs, which means that some people may not be able to afford to buy a home.

Lower Home Loan Eligibility: With higher interest rates, the eligibility for home loans may reduce. This means that some borrowers may not be able to borrow the same amount of money as they would have with lower interest rates.

Impact on Home Loan EMI Budget: With higher EMIs, home buyers would need to rework their monthly budgets to accommodate the increased EMI payments. This could impact their overall financial planning.

Lower demand for housing: Real estate is driven with sentiment in India. As the cost of borrowing for home loans increases, demand for housing may decrease. This could impact the real estate market negatively, with fewer people willing to buy homes, leading to a drop in housing prices.

Impact on Loan Transfer: With higher interest rates, some home buyers may consider transferring their home loans to other lenders who offer lower interest rates. This could lead to an increase in loan transfer requests.

Impact on Investors: With higher interest rates, some potential home buyers may prefer to invest their money in other instruments rather than buying a home. This could lead to a slowdown in the real estate sector.

Impact on developers: An increase in repo rates could impact real estate developers, as higher borrowing costs would increase the cost of construction and reduce the demand for homes.

An increase in repo rates in India impacts home buyers by increasing their borrowing costs and reducing affordability. It also impacts the real estate market by reducing demand for housing and potentially lowering housing prices.