[ecis2016.org] With the repo rate now standing at 4.90%, banks have started to pass on the burden of increased lending rates to buyers
Loans are a potent financial instrument that enable people to buy their dream homes, by focusing on their future earning capacity. As the size of home loan are usually very big, borrowers require a long repayment tenure. So, even a little change in the home loan interest rate can result in a big change in the total repayment requirement during the loan’s term.
The RBI recently increased the repo rate to 4.90%. Usually, when the interest rate moves upward, it takes a toll on home-buying sentiment. However, the recent home sales data tell a different story. Till June 27, 2022, the total number of conveyance home sales recorded in Mumbai touched 8,535, netting Rs 632.88 crore in revenue. If we look at the number of conveyance sales recorded in June 2021 and June 2018, it was 7,856 and 6,183, respectively. Does it mean home buyer’s sentiment has turned belligerent against the rise in the home loan interest rate?
Is property-buying on the rise?
Subhankar Mitra, MD, advisory services, Colliers India, says, “The property market became very active from the second half of 2020, which was fuelled by multiple factors, such as rate cuts by prominent developers, reduction in stamp duties by many state governments, as well as lower interest rates. The trend continued well into 2021, along with the rebound of the economy and a boost in the employment sector. As result, home sales went up from 2018-19 to 2020-2021. Although many of sops started to taper-off towards the end of 2021, a robust job market continued to push home sales. There is also a lag effect between the finalisation of home purchases and the actual registration. This is demonstrated in the surge of conveyances in the first half of 2022. However, if inflation and house prices maintain an upward trend, we might witness a saturation in the near term.”
Realty experts point out that when the interest rates increase, it often increases the borrowing cost for both, home buyers, as well as developers. Hence, property rates may increase, owing to the increase in the cost of borrowing for the developers. This is invariably passed on to home buyers, who may also have to shell out more on their EMIs. On the other hand, existing home buyers enjoy capital appreciation with the rise in the property rates. As the impact of the increase in cost of borrowing is not reflected immediately in property prices, prospective home buyers may have rushed to buy homes in the interim period, resulting in increased property conveyances.
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Impact of rising interest rates in metro cities vs small cities
If we compare the annual number of home sales in Maharashtra in June 2022, there was a decrease in conveyance sales (1,45,526 versus 1,25,225). The moot question, hence, is: Why is there a different trend in Mumbai versus the rest of Maharashtra?
“The change in the interest rates alone, is not the deciding factor for the variance in home sales across various parts of the country and the state. One of the major contributors was the availability of the right product at the right price. In 2020, there was hardly any new launch anywhere. However, between 2021 and 2022, there was a flurry of new launches. Overall, new launches across tier-1 cities increased by 68%. Growth in sales volume was more supply-driven. In other smaller cities of Maharashtra, there were not many options available to the buyer. Consequently, sales also remained on the lower side, as compared to metro cities,” Mitra explains.
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Is it a challenging time for home buyers?
“With offices reopening and disposable incomes being restored, people are gravitating towards tier-1 cities, such as Mumbai. As long as the hike is within a certain range, it is not much of a worry, either for the industry or the home buyers. To absorb the impact of increasing interest rate, a home buyer may take a few more quarters to save on their corpus towards their own contribution, in order to manage EMIs,” says Vimalendra Singh, chief sales and service officer at Mahindra Lifespace Developers Limited.
Realistically the impact of increased interest rates on EMIs is not very significant, at present. Let us take an example. The EMI for a loan amount of Rs 30 lakh for a tenure of 20 years would increase by a nominal Rs 972 if the rate goes up from 9% to 9.5%. For most households, it would not be very difficult to absorb this cost, although the cost of running a household has gone up in recent times, due to inflation.
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How can home buyers prepare, to buy a home amid the rising interest rate trend?
One of the most common practices to counter the higher rate of interest, is to opt for a longer tenure, thereby, reducing the EMIs. However, the total outflow on interest payment will be higher in such cases. If the borrower can make a few interim part payments during the tenure of the loan, the overall burden of interest rate also comes down drastically.
Do banks levy penalties on pre-payment of all types of home loans?
There is no prepayment or pre-closure penalty charges on floating-rate-based home loans. However, banks may levy penalties under fixed-interest-rate based home loans.
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