How rising home loan interest rate impacts homebuyer affordability

While home loan interest rates are still well below pre-pandemic levels, it is worthwhile to gauge the impact of every increase in the home loan rate on the EMI load and eventual affordability levels of the end consumers.

homebuyer affordability, home loan interest rate, rbi repo rate, EMI, inflation
Home loan rates are still approximately 150 bps below those prevailing in 2019.

Rising home loan interest rate impacts homebuyer’s affordability. Knight Frank India in a recent note has discussed how rising interest rates impact’s home buyer’s affordability. The note provides details on impact of home loan increase in terms of basis points by 50, 100, 150 and the respective increase in EMI amount and decrease in affordability index levels.

The 50-bps hike in the repo rate in June Monetary Policy Committee (MPC) announcement comes on the back of a 40-bps increase in May. Further, the significant 1 percentage point increase in the FY23 consumer inflation estimate to 6.7%, which is higher than RBI’s upper tolerance band of 6%, also suggests that further rate hikes are likely.

The RBI is likely to continue increasing the policy rate to narrow the gap between consumer inflation and repo rate and reduce the extent of negative real interest rate in the economy, which still stands at -1.8%.
 
While home loan interest rates are still well below pre-pandemic levels, it is worthwhile to gauge the impact of every increase in the home loan rate on the EMI load and eventual affordability levels of the end consumers.

Impact of home loan increase on EMI and affordability

Source: Knight Frank Research
 
Note: Affordability and income levels are calculated keeping all variables constant, except for the interest rate.
 
Home loan rates are still approximately 150 bps below those prevailing in 2019 and a reversion to those levels will result in an 11.73% increase in the EMI load for the homebuyer and an effective 3.38% decrease in affordability basis the Knight Frank Affordability Index.

This analysis does not account for change in income levels or house prices and considers interest rates as the only variable. House price levels have increased over the past 12 months across most markets and should also have a material impact on affordability.
 
Average for Bengaluru

Even while basis the home loan terms of individual homebuyers there will be varying level of lender response measures, the increase in Repo Rate earlier during May and now in June, will make EMIs costlier for buyers. With the increase in home loan interest rate during May and now in June, EMIs have increased for the borrower. For instance,  assuming complete transmission of repo rate increase, for a home buyer in Bengaluru with a home loan of Rs 75 lacs, the EMI has increased from Rs 59,962 per month before the rate hike to Rs 61,803 in May and now Rs 64,141 in June.
 
Average for NCR

Even while basis the home loan terms of individual homebuyers there will be varying level of lender response measures, the increase in Repo Rate earlier during May and now in June, will make EMIs costlier for buyers. With the increase in home loan interest rate during May and now in June, EMIs have increased for the borrower. For instance,  assuming complete transmission of repo rate increase, for a home buyer in NCR with a home loan of Rs 1 crore, the EMI has increased from Rs 79,949 per month before the rate hike to Rs 82,404 in May and now Rs 85,521 in June.
 
Average for Mumbai

Even while basis the home loan terms of individual homebuyers there will be varying level of lender response measures, the increase in Repo Rate earlier during May and now in June, will make EMIs costlier for buyers. For instance,  assuming complete transmission of repo rate increase, for a home buyer in Mumbai with a home loan of Rs 2 crore, the EMI has increased from Rs 159,898 per month before the rate hike to Rs 164,807 in May and now Rs 171,041 in June.
 
In practical terms, the increase in home loan rates usually translates to an increase in tenure rather than an actual increase in EMI, effectively subduing its impact to some extent.

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