Retail home loan interest rates have breached the nine per cent mark after the Reserve Bank of India raised the repo rate again by 35 basis points (bps).
With the latest hike, the central bank’s repo rate has increased by 225 bps since April 2022. It means the equated monthly instalments (EMIs) would increase by 20 per cent or the loan tenure by 13 years.
Should You Buy A Home Now Or Later?
You can do so if you can afford it. Says Vishal Raheja, the managing director of InvestoXpert.com, a real estate consultancy firm, it won't be a wise decision just because home loan rates have spiked. Home loan rates may increase or decrease, but property prices increase every year. "You should not miss the appreciation due to a spike in the repo rate," Raheja adds.
Usually, the housing demand falls when interest rates rise sharply. It gives buyers an opportunity to negotiate with the seller for a lesser price. "It becomes a buyer's market then and can result in a good deal," says Chenthil Iyer, founder and chief strategist of Horus Financial Consultants.
Should You Go For Fixed Or Floating Rates?
As the rates are expected to go up, many believe a fixed interest rate loan could shield them from future rate hikes. However, Iyer says one should always opt for floating rates because interest rates generally fall in the long term.
“Consider what happened in the last 20-25 years. Interest rates at the time were around 11-12 per cent, but the current rates are in the range of eight to nine per cent even after the recent hike. So, a floating rate is a better option.”
Besides, floating rates offer repayment flexibility. For example, you can increase the EMI after a salary hike or prepay a reasonable amount when the rate increases without attracting a penalty. On the other hand, most fixed-rate loans have limitations that may not allow you to prepay a loan.
Agrees Raheja, “Floating is always good because fixed is always higher than floating. Raheja says the interest rate would come down to around 7.5 eight per cent in the long run. So it is a temporary spike.
Should You Increase The Tenure Or EMI?
He adds that a higher EMI is better than a long tenure. You can have freedom in old age if you close the liability at a young age. But if you can't afford it, you will have no choice but to increase the loan tenure.
Iyer says one should raise the EMI when the interest rates go up to avoid a long tenure. If an increase in the EMI is not possible, "prepay some amount from your savings so that the EMI and tenure are not affected". Increasing the tenure should be the last resort and must be used only if the above two possibilities don't exist.
Furthermore, you should decide as per your age group. "If you are in the 30-40 age group, you can go for a long tenure to reduce the EMI burden. But if you are older, you shouldn't increase your tenure because you may not be able to pay your EMIs by the retirement age," says Raheja.