While the demand for housing in India keeps increasing, there has also been a sudden spike in home loan rates. Home loans in India are a boon for prospective homeowners. They allow borrowers to buy their aspirational dream houses. However, in recent years, both the real estate and home loan sectors have seen sharp price changes.

The consistent hikes in repo rates since May 2022 have further aggravated the home loan situation. In FY 2022-2023, the Reserve Bank of India revised repo rates six times, leading to an increase in lending rates for banks and NBFCs. The RBI increased the repo rate by 25 basis points in June 2023. The latest repo rate stands at 6.50% (as of July 2023).

Here’s a detailed explanation of why home loans have become expensive in India:

Why Home Loans Have Become Expensive in 2023

The deciding factor that makes home loans expensive is the repo rate. However, there are additional factors that have made home loans so expensive in India.

Increase in repo rate

The repo rate is the rate at which India’s central bank grants money to commercial banks. When the repo rate increases, banks tend to increase their lending rates, including home loan rates. The repo rate has been increased by 250 basis points since May 2022 and is currently at 6.50%.

Inflation

Inflation [Consumer Price Index (CPI)] has been rising in India in recent months, reaching 4.81% in June 2023. The RBI has been raising interest rates in an attempt to control inflation, which has also led to higher home loan rates.

Increase in demand for home loans

The demand for home loans has been rising in India in recent years, due to factors such as rising incomes and falling interest rates. Demand for housing solutions has also led to an increase in competition for home loans. This increased demand has put upward pressure on home loan rates.

As home loan rates go up, many borrowers face repayment tenures well into retirement.

What do you mean by Repo Rate?

The repo rate is instrumental in controlling inflation in the country. It is defined as the rate at which the RBI lends money to commercial banks or financial institutions in India. Repo rate is short for ‘Repurchasing Option’ or ‘Repurchase Agreement.’ It is the rate at which banks and NBFCs borrow from India’s apex bank.

Borrowers have to pay extra interest when there is a spike in the repo rate. It means the EMI on the home loan will increase if the lender adjusts their lending rate as per the new repo rate.

How Repo Rate Affects Your Home Loan

Rashi was excited at the prospect of owning a house. She bought the property when the prices were low. However, the hike in the repo rate has made it difficult for her to accommodate the EMIs.

When the Reserve Bank of India increases the repo rate, home loan EMIs increase. It leads to a higher principal repayment portion in the EMI. A spike in the repo rate also increases the loan tenure. The lender decides how much extra you have to pay after RBI increases the repo rate.

The only options left for a borrower like Rashi are limited. Her home loan agent advised her to opt for prepayment options and reduce the overall loan tenure. Andromeda Loans allows your customers to apply for prepayment without any penalty. They can either prepay the entire home loan or a portion of it.

A Timeline of Repo Rate Changes from 2022-2023

Before understanding the history of repo rate changes, you have to know what basis point means.

Understanding Basis Point or BPS

Basis points are a unit of measurement used to express the rate of change in an index or the percentage change in the value of financial instruments (like the repo rate). One basis point is equal to 0.0001 or 0.01% (1/100th of a percent) in decimal notation.

Changes in the Repo Rate in 2023

The year 2023 has seen a less tumultuous increase in repo rates.

April 6, 2023: The repo rate remained unchanged at 6.50%.

February 8, 2023: The RBI hiked the repo rate for the sixth time. The 25 bps hike took the repo rate to 6.50%.

Changes in Repo Rate in 2022

December 7, 2022: The RBI announced an increase in repo rate by 35 basis points. It was the fifth and final increase in 2022. The new repo rate stood at 6.25%.

September 30, 2022: The RBI increased the repo rate by yet another 50 basis points. The repo rate after the revisions stood at 5.9%.

August 5, 2022: The RBI increased the repo rate by another 50 basis points. It was the third upward revision in 2022. The revised repo rate was 5.4%.

June 8, 2022: The RBI increased the repo rates by 50 basis points. It was the second

increase in 2022. The revised repo rate was 4.9%.

May 4, 2022: The RBI increased the repo rate by 40 basis points (bps) for the first time after COVID-19. The revised repo rate stood at 4.40%.

Is there a solution for home loan borrowers?

The increase in repo rate is a financial burden for home loan borrowers. It is especially burdensome if they did not include repo rate adjustments when planning for their home loan repayments. However, there are a few silver linings that can help your customers buy their dream houses.

Refinancing their home loan

Borrowers can refinance their home loans and pay lesser EMIs. Lenders like Andromeda Loans have smart refinancing options, especially for new borrowers.

Home loan repayment options

They can always look into home loan repayment options as they do not incur penalty charges. New borrowers can consider a shorter repayment period. A shorter repayment period will mean higher monthly payments, but one will pay less interest overall.

Look for a fixed-rate loan

A fixed-rate loan will protect one from rising interest rates, so it is a good option if your customers are planning to stay in their homes for a long time.

Make a down payment

A larger down payment will reduce the amount of money one needs to borrow, which will lower monthly payments and overall interest costs.

Home loan is a very useful financial instrument that allows borrowers to buy the house of their dreams. While the repo rate may spike in the upcoming years, your customers can always manage their financial strain with better planning. Follow Andromeda Loans today for more informative blogs.