Mortgages begin to pinch | mint

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Bombay : While rising lending rates have yet to deter new homebuyers, those who borrowed when the rate was at a decade low last year are starting to weather the heat.

Home loans were among the most sought-after products, accounting for the bulk of the consumer lending boom in the banking sector. Given that all home loans since October 2019 have been linked to external benchmarks – primarily the Reserve Bank of India’s repo rate – the 140 basis point (bps) rise in the benchmark policy rate since May has resulted in a corresponding increase in mortgage rates.

For example, State Bank of India home loan rates have fallen from 6.7% in September 2021 to 8.05% today. Private lender Kotak Mahindra Bank, which offered one of the lowest rates on home loans at 6.5% in September, has increased it to 7.99% now.

Therefore, say, a borrower who received a loan of 75 lakh last year payable over 20 years, will have to pay additional interest of 74,000 to 81,000 each year.

“The time for paying back slowly is over,” said Adhil Shetty, managing director of financial services marketplace BankBazaar.com.

Shetty said the 140 basis point increase means that today, even for a 20-year loan, the amount of interest to be repaid is greater than the principal. To reduce the burden of rising loan rates, an existing borrower should consider refinancing their loan, periodically prepaying, voluntarily increasing their monthly equivalent payments (EMI), or having a viable combination of all three options, a- he declared.

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Bankers said it’s too early to tell whether rising interest rates will impact demand for home loans, but existing borrowers will see their monthly repayments rise. A senior private sector banker said, on condition of anonymity, that since interest rates rise every two months, the impact on demand will be somewhat visible when rates stabilize after a few months. “We will be looking at an internal exercise to check how our home borrowers are doing in this scenario.”

Existing customers under the variable rate home loan program have the option of opting for higher EMIs or extending the term of the loan when rates rise, he added.

However, there is a catch. BankBazaar’s Shetty said that if the EMI remains constant, the tenor of a 20-year loan can increase by about eight years. As most lenders are unlikely to sanction the increased tenor, EMIs will increase for a significant percentage of loans, especially those recently disbursed, he said.

The total outstanding amount of bank mortgages amounts to 17.4 trillion in June, up 15.1% from a year earlier, RBI data showed. This figure is higher than the 11% year-on-year growth recorded in June 2021.

According to a report by Bank of Baroda economist Aditi Gupta, while higher lending rates may deter some borrowers from the housing market, demand for housing as a safe investment is likely to offset this. In addition, single-family home buyers will be prepared for interest rates to rise and fall over the life of their loans and therefore cannot be deterred from such purchases, she said in a report. of August 24. “The growing importance of home loans can be gauged by the fact that the ratio of individual home loans outstanding by regular commercial banks and housing finance companies to India’s gross domestic product (GDP) has dramatically increased over the past 10 years.”

From 6.8% of India’s GDP in FY11, it was 11.2% in FY21, according to data available in the report quoted above.

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