With RBI MPC not hiking rates, affordable home buyers have clearer planning trajectory

• Amidst the rising cost of properties and the cumulative 250 bps rate hikes by the RBI in the last one year and more, affordable housing buyers have taken a blow.
  
• With a steady interest rate environment, potential buyers of affordable homes may be encouraged to proceed with their home buying plans.
  
• Banks may potentially be required to provide borrowers with clearer and more detailed information about how their loan EMIs are calculated and how they may vary over time.
  

The Reserve Bank of India keeping lending (repo) rates unchanged is nothing but good news for aspiring home buyers, especially for those in the middle income categories who aspire to buy a home. Affordable home buyers were at the receiving end of rate hikes for more than a year before the RBI paused hiking rates. Now, the third successive pause gives buyers a better planning window, especially as economists don’t expect further hikes till the end of the year.

“By maintaining a steady interest rate environment, there is a hopeful projection that these potential buyers will be encouraged to proceed with their home buying plans,” says Pradeep Aggarwal, founder and chairman, Signature Global, a real estate developer.

As per research by ANAROCK, a real estate service provider, for homebuyers with a ₹30 lakh loan of a 20 year tenure, EMIs jumped up by 20% in the last two years. Home loan borrowers who were paying an EMI of approximately ₹22,700 in July 2021 are now paying approx. ₹7,300 - an increase of approx. ₹4,600 per month.

“While home prices have also risen by 8-15% over the last twelve months, this increase is likely to be kept in balance by the countervailing forces of the unchanged policy rates. With interest rates holding steady, affordability synergies will continue to persist and thus support the homebuyer momentum and residential sales during the coming quarters,” says Samantak Das, chief economist and head research & REIS India, JLL, another real estate service provider.

Greater transparency on EMIs for floating rate loans

The RBI Governor during his monetary policy speech said that steps will be taken to bring greater transparency to equated monthly instalments of floating rate loans.

Says Das, “When there is change in policy rates and interest rates change, banks normally change the tenure without intimating the customers. Only when the EMI changes, is the customer intimated. What this would mean is that even for a tenure change banks need to adhere to a framework and intimate customers.”

While specifics have not been provided in the monetary policy, such transparency can mean a number of things. “For example, banks may potentially be required to provide borrowers with clearer and more detailed information about how their loan EMIs are calculated and how they may vary over time,” says Anuj Puri, Chairman, ANAROCK Group.

Lenders may also need to provide borrowers with comprehensive information on how the interest rate for their floating rate loan is determined. This may involve specifying the benchmark rate and explaining how the borrower's interest rate is derived from the benchmark rate, including any additional margin or spread added by the lender.

“Borrowers could potentially expect a breakdown of their EMI components, including the portion allocated to interest and principal repayment, to help them understand how their monthly payment is distributed and how much is going towards reducing the principal amount owed versus paying interest charges,” says Puri.

In the event that the interest rate for a variable-rate loan fluctuates, banks might need to inform borrowers in a timely manner about the alteration, including its effect on their EMIs. This procedure would enable borrowers to remain updated regarding alterations in their repayment commitments and manage their financial plans accordingly.