Pros And Cons Of Rising Home Loan Interest Rates In India

Gurgaon-based 32-year-old interior designer Natasha Verma purchased a lavish home 12 months ago. At a time when real estate costs were low, the young single mother spared no expenses to furnish her dream home - from Italian marble flooring to ultra-modern bathroom fittings, a spectacular modular kitchen to the latest appliances, she did it all. But ever since the RBI has hiked the repo rate in the past few months, the rising monthly EMIs are keeping her awake all night.

On June 8, 2023, the Monetary Policy Committee (MPC) increased the repo rate by 25 basis points, taking it to a whopping 6.50% from 6.25% in just 4 months (from February 2023). Amid the rising cost of borrowing, banks and financial institutions have increased their interest rates, which has led Ms. Verma and many others to pay higher monthly equated installments towards home loan repayment.

If you too have purchased a housing loan, there is a high chance of your loan being an expensive one. On such occasions, restructuring or refinancing for cheaper interest outgo over the length of the tenor may be a good idea. However, for that, you must first be aware of the pros and cons of rising home loan interest rates to be able to make the most out of it.

Cons of Rising Home Loan Interest Rates

Home loan interest rates are linked to an external benchmark, which in this case is the repo rate. A hike in the repo rate means an increase in the rate of interest as well. The below pointers shall explain the cons of rising home loan interest rates -

• New loans will be expensive - Since banks are having to pay a higher interest to depositors, they are charging the borrowers a raised rate as well.
• Payments on floating-rate loans will go up - In addition to new loans, current rates of existing loans, floating-rate loans, and credit cards are also on the rise.
• Possibility of a recession - Despite the RBI's efforts to increase repo rates to control inflation, there's a high chance of the economy being pushed towards a recession.
• Continuing volatility of stock markets - The higher cost of business and the increased chances of a recession have led to concerns over a volatile situation in the stock market.

Market volatility refers to the magnitude and frequency of upward or downward price movements. The greater and more frequent the movement, the more volatile the market will be.

• Declining home equity - Home equity accounts for a large part of one's net worth. As increased rates of interest make housing less affordable, property prices start going up, lowering the total value of home equity and consequently the net worth.

Pros of Rising Housing Loan Interest Rates

Although higher rates of interest may make borrowing an expensive affair and affect the overall growth of the economy, there are some benefits that come along. Check out some of the pros of rising home loan interest rates here -

• More interest on saving accounts - Banks and financial institutions usually increase the interest amount paid on deposits over time as the RBI hikes the rates. Fixed-income securities, such as treasury bills, corporate bonds etc. tend to offer a higher rate of interest due to this.
• Increase in pay - Entitlement payments and regular benefits are all indexed to inflation, which means at any given point, wages, prices, and interest rates will automatically be adjusted with inflation.
• Inflation may go down - One of the major factors leading the Reserve Bank of India to hike the rate of interest rates is concern over inflation. As per the latest data presented by the Ministry of Statistics and Program Implementation, India's retail inflation, measured by the Consumer Price Index (CPI), eased to 6.83% in August 2023, from 7.44% earlier this year.

How to Benefit from Rising Interest Rates?

Here are a few tips to keep in mind if you want to take advantage of the increased home loan interest rates -

1. Boost Your Savings

In a high-rate environment, loans are typically more expensive, but savings accounts can help you earn more. Apart from contributing to your savings accounts, deposit in social securities, like bonds and treasury bills and so on.

2. Pay Off High-Interest Debts

Focus on paying off your outstanding loans and credit card debts or opt for a home loan balance transfer to counter the ever-increasing interest rates. The sooner you repay your dues, the better for your financial health as it will also reflect on your credit score.

So, if you are still wondering whether you should get a home loan when the interest rate is high, we suggest weighing down all the pros and cons of rising home loan interest rates. It is not possible to predict when the interest rates will go down. Therefore, prospective borrowers should not send out their applications depending on the course of home loan interest rates. Instead, they should opt for a loan based on their requirements and financial health.

However, when you transfer to a new lender for lower rates, be sure to calculate your net savings. Factor in charges, such as administration and processing fees. Also, check the new interest rates and whether they are linked to the RBI benchmark in order to comprehend the loan-term impact on home loans. You will also have to submit additional documents with your new financier for a smooth transfer.

Summary

There are several pros and cons of rising home loan interest rates. One of the major advantages of higher interest rates is the higher returns earned on savings accounts. Carefully review all the pros and cons and follow a few smart tips to take advantage of the situation.