Demand for home loans is likely to moderate as borrowers confront higher equated monthly instalments (EMIs) after back-to-back repo rate hikes by the Reserve Bank of India (RBI) to tame inflation, six bankers and industry experts said.
“Rising interest rates will definitely have a negative impact on the (home loan) demand,” Nirmal Jain, founder of IIFL Group, told Moneycontrol. “Interest rate hikes worth 50-to-100 basis points at this stage can be absorbed, but if they go up further by another 100 bps, there will be an impact on home loan demand; it will slow down.”
On May 4, RBI hiked its repo rate, the rate at which it lends short-term funds to commercial banks, by 40 bps to 4.4 percent and followed it up with a 50-bp increase on June 8, to cool consumer price inflation that accelerated to 7.79 percent in April, a 95-month high.
One basis point is one-hundredth of a percentage point.
Across the industry, home loan rates have gone up by 75-to-100 bps, Jain said. Rates can rise by another 75-to-100 basis points at the industry level, assuming the rate hike cycle will continue for some time.
If RBI is compelled to into undertaking more rate hikes, housing loan demand will moderate by a certain degree, Jain added.
EMIs set to rise
Most economists are expecting another repo rate hike of at least 25 bps in the August monetary policy.
Already, a clutch of banks and housing finance companies have begun to pass on higher rates to customers by increasing the marginal cost of fund-based lending rate (MCLR) and the retail prime lending rate (RPLR).
Currently, housing finance companies in India lend at RPLR. Most banks peg their loans to MCLR and external benchmarks.
On June 9, Housing Development Finance Corporation (HDFC) increased its RPLR by 50 basis points with effect from today. It was the fourth time in a month that India’s largest home loan provider hiked its home loan rate. Home loan rates at HDFC start at 7.55 percent onwards.
With inflation unlikely to cool, the Monetary Policy Committee of RBI is likely to hike the repo rate further in the upcoming policies, which could consequently make EMIs dearer, and could probably deter home loan borrowing.
“In April, the bottom (of home loan rates) were at 6.40 percent to 6.80 percent. Most lenders had their lowest rates pegged in that zone. Adding 90 basis points to that, the bottom moves up to 7.30 percent to 7.70 for existing borrowers,” said Adhil Shetty, chief executive officer at BankBazaar.com. “The days of sub-7.00 percent rates are over. We’ll be nudging 8.00 percent soon.”
For the housing finance sector, high pent-up demand has played out quite well so far. Simply put, pent-up demand is when there is a rapid increase in demand for a product, usually following a period of subdued spending.
During the COVID-19 pandemic, most borrowers deferred their home purchases because of job losses and salary cuts.
“While high-pent up demand is playing out currently due to stamp duty reductions etc, it is unlikely to sustain,” said Nachiket Naik, head of corporate lending at Arka Fincap, a non-banking finance company. “Input cost pressures have risen significantly due to the hike in global commodity prices, resulting in higher asset prices which, coupled with a higher cost of borrowing, will mean a double whammy for home buyers.”
For banks, it makes sense to pass on rate hikes to borrowers and enjoy higher margins because there is sufficient liquidity in the system and the cost of deposits need not be high.
“Once the RBI sucks out more liquidity from the banking system, banks would be forced to increase deposit rates,” said an executive director at a state-run bank, requesting anonymity. “At that point, the transmission of higher interest rates to borrowers will be more aggressive than what it is now. So pent-up demand is bound to dry up.”
The banker added that a “sizeable portion” of the bank’s loan book is linked to external benchmarking.
Aka Fincap’s Naik added that the impact will be more in the affordable housing segment where the operating margins are “significantly thinner” than in the premium segment. The pass-through of rate hikes will be back-ended and that should lead to a slowdown in demand for housing loans eventually, he added.
Options for borrowers
With back-to-back hikes, home loan rates are expected to increase rapidly. In this scenario, what should borrowers do to lessen the burden of high home loan EMIs?
“Pre-pay,” said BankBazaar.com’s Shetty. “There are two scenarios here. One: inflation rises now but moderates by 2023. In that case, go for moderate pre-payments. Borrowers can voluntarily increase EMIs or pre-pay strategically to nullify the tenor extension. Both these options will shave months or years off the loan.”
“If inflation continues to be high and the rates start inching towards double digits, borrowers can pre-pay aggressively,” Shetty added.
Borrowers can also get the lowest rates by improving their loan eligibility, said experts. This happens largely with income stability and a credit score.