Rising home loan rates have dampened the demand for home loans. The total outstanding home loans of banks grew to Rs 19.9 trillion at the end of the quarter ended June 2023, from Rs 19.4 trillion in the preceding three-month period, registering a quarter-on-quarter (QoQ) growth of 2.7%, the slowest pace since September 2021. The QoQ growth in home loans has averaged around 4% in the past seven quarters, and has fallen below the 3% mark for the first time in two years.
A constant hike in interest rates on home loans by banks has caused the slowdown in disbursals, say experts. The weighted average lending rate on home loans has crossed 9% and is 9.12% at present, which is a five-year high.
“Home loan is still a basic need of an individual in our country, so there is always demand for these loans. However, there is a section of borrowers who are sensitive to interest rate movement,” Virat Diwanji, group president and head – consumer banking, Kotak Mahindra Bank, told FE. “There is some moderation in demand for home loans during the period when interest rates move up.” When interest rates are on a downward trajectory, borrowers tend to go for slightly bigger houses, he said.
Banks have raised interest on home loans in response to a series of hikes in the repo rate by the RBI, which has raised the policy rate by 250 basis points since May 2022. According to the RBI data, the weighted average lending rate on home loans was at 7.34% at the end of March 2022. The rates have inched up consistently since then, showing that the lenders are passing the rise in cost of funds to borrowers by hiking interest rates on home loans.
“We have seen some erosion in home loan disbursals in the last two quarters. We have witnessed around 5% decline in the growth rate of our home loan disbursals,” said the retail banking head of a public sector bank.
The period of high interest rate is unlikely to end soon, and borrowers will have to wait till the second half of the current calendar year to see a decline in rates. Experts see the central bank cutting the repo rate only in the second half of 2024. The softening of interest rate will spur the demand for home loans.
“The interest rates will be a challenge for the next 12 months. We will see some bit of yields softening in about next six months, with the RBI maybe relooking at the repo rate in 12 months and probably an uptick in housing loans from then,” said Vivek Iyer, partner – financial services at Grant Thornton Bharat. “Rising interest rates are a function of managing inflation in an extremely volatile environment and is actually a painful but a much-needed measure. It’s important for customers to therefore time their purchase of homes in a manner that makes personal financial sense.”