Monthly home loan EMIs are set to be revised upwards in the coming months with an expected further increase in repo rate by the Reserve Bank of India (RBI).
In a rising interest rate scenario, lenders generally adjust the jump in interest rate by extending the EMI tenure. However, there is limited headroom for EMI tenure extension now. Therefore, housing finance companies are likely to increase the monthly EMIs if the repo rate is further increased by RBI.
According to an analysis by ICRA, with a 150-250-bps increase in interest rates, EMIs could go up by 12-21% in the case of prime home loans and 8-13% in the case of affordable home loans while maintaining the original tenure.
ICRA said in a statement that the rising interest rate scenario presents a dilemma for housing finance companies (HFCs). To deal with the situation, mortgage lenders normally increase the equated monthly instalments (EMIs) while keeping tenures constant or do it vice-versa.
Lenders usually extend the tenure first to keep the borrower’s monthly debt burden in check. However, there is limited headroom to increase the tenure as incremental loans in the prime home loan segment already have long tenures and a further extension in loan tenures will lead to overall tenures extending beyond the working life of the borrower.
In the case of affordable home loans, the extension of loan tenures can lead to negative amortisation, given the high-interest rates.
“The impact is expected to be lower in the case of affordable home loan segment vis-à-vis the prime home loan segment since those loans are already at high rates. However, even with revised EMIs, the fixed obligation to income ratio (FOIR) is expected to increase by less than 10 percentage points and hence remain manageable, unless the original loans were given at aggressive FOIRs,” said Manushree Saggar, Vice President & Sector Head, Financial Sector Ratings.
According to ICRA, lenders may not pass on the entire increase to the end borrowers given the competitive market space and thus the impact on EMIs could be further limited.
“As per our estimates, HFCs have increased the lending rates by about 50-100 basis points (bps) in H1FY2023 compared to the 190-bps hike in benchmark repo rates. Also, some lenders might follow a mixed approach of changing both EMI and tenures to manage the monthly debt burden of borrowers,” ICRA said.