What homebuyers should do now as RBI keeps repo rate unchanged

Despite a 25-basis points hike expectation, the RBI decision to keep the repo rate unchanged at 6.5% in its monetary policy meeting today is certainly a big relief for the existing and prospective borrowers who were waiting for rising interest rates to settle down. Home buyers can take a sigh of relief after this decision as the interest rates had almost peaked owing to back-to-back repo rate hikes decision by the RBI to control inflation and ensure smooth flow of liquidity in the economy.

Reacting to the RBI’s repo rate decision, Adhil Shetty, CEO, Bankbazaar.com, said, “Headline inflation remains high but it’s shaping towards the RBI’s comfort zone. The RBI keeping the repo rate paused at 6.50% is certainly a big breather for existing and prospective borrowers who were waiting for rising interest rates to settle. Borrowers whose loan tenures increased due to back-to-back hikes may now consider making partially or fully repayment of their loans as the repo rate remains unchanged.”

According to industry experts, the worst seems to be over. Interest rates are stabilising. Inflation permitting, we may see rates drop before the end of 2023. If you’re on a repo-linked loan, your rate should automatically reset after any repo rate change within a quarter. The lowest rates being offered in the home loan market today are in the 8.40-8.50 range for eligible borrowers. If you’re paying a significantly higher rate, consider a refinance. If you’re able to shave off 50 basis points or more off your rate, it could lead to significant savings over the long term.

Also Read: True Cost of Home Ownership – Know this before buying your dream home

When you think about your home loan rate, also think of it in terms of the premium you pay over the repo. For example, at 8.50%, the premium over the repo is 2%. Prime borrowers with good credit histories and strong income credentials can borrow at the lowest premium while others will have to pay higher.

The RBI has often used the tool of repo rate hike and decrease to stabilise the Indian economy. While the repo rate hike increases the cost of borrowing, the rate decrease encourages lending and investment. However, the effects on the housing market, which is a significant contributor to economy, are quite nuanced.

“RBI’s decision showcases the central bank’s prudent approach towards maintaining stability and fostering sustainable economic growth considering the global economic risks and uncertainties. By keeping interest rates steady, the RBI has exhibited its commitment to strike a delicate balance between addressing inflation concerns and supporting businesses and individuals in these challenging times,” Shetty explained.

Let’s explore how repo rate changes affect home buyers and their buying decision.

Impact of Repo Rate Hike on Home Buyers

Repo rate hike means that the cost at which banks borrow from the RBI increases. Banks have to pass on this cost to their loan borrowers, causing an increase in the lending rates. The increase in the lending rates, in turn, makes home loans costlier for buyers. High-interest rates discourage homebuyers from investing in property, which leads to a decrease in demand, causing a slump in the housing market. The high rates force homeowners to reassess their EMIs, monthly budgets, and lifestyle plans, leading them to delay their home-buying decisions.

A repo rate hike may also lead to real estate price correction – a situation where property prices decline because the demand for housing decreases. For homebuyers, this could be an opportunity to get a good deal since sellers are keen to offload their inventory. On the other hand, developers might find it challenging to sell their property leading to developers reduce their cost.

Impact of Repo Rate Decrease on Home Buyers

A repo rate decrease effectively makes loans cheaper for buyers as it reduces the lending rates. Cheaper loans inspire more homebuyers, leading to an increase in demand for housing. As the demand increases, the prices tend to go up, leading to appreciation in value, giving investors profits. The repo rate decrease also results in builders and developers getting cheaper loans, which reduces their cost of construction, incentivizing them to start new projects.

In addition, a repo rate decrease leads to a decrease in the cost of borrowing, enabling existing homeowners to refinance their loans to take advantage of the cheaper rates. Homeowners have the option of reducing their EMIs or reducing their loan tenure. In either case, the decrease in rates enables homeowners to save more.

Repo Rate hikes and decreases are rarely permanent, and the RBI takes these decisions based on the state of the economy. The repo rate hike and decrease also have cascading effects on various economic indicators, affecting the affordability of home loans.

Conclusion

For homebuyers, a repo rate hike or decrease is an important factor that influences their decision to buy property. During repo rate increases, buyers delay purchases to avoid getting into expensive loans while during a decrease, buyers accelerate purchases to leverage the cheaper rates. Thus, the impact of repo rate hike or decrease depends on the broader economic environment. There will be winners and losers, which could be affected differently – homeowners seeking to refinance their loans may win, while first-time buyers may find it challenging to enter the market.

Ultimately, the success of India’s housing market depends on a variety of factors, ranging from demographic trends to government policies.

Homebuyers, therefore, need to be aware of interest rate movements and their impact on the housing market to make informed investment decisions. Nevertheless, it’s crucial to plan long-term, assessing current and future requirements and their affordability. A sound financial plan and an understanding of economic trends can go a long way in ensuring that the homebuyer makes a profitable investment that meets their needs.