The incessant repo rate hikes by the Reserve Bank of India (RBI) have led to a constant increase in home loan interest rates for sometime, much to the dismay of borrowers. As a result, they either have to shell out more money in the form of equated monthly installments (EMIs) while sticking to original loan tenure, or raise their tenure while keeping the same EMI. A recent analysis shows that of around 55 lakh home loan accounts linked to External Benchmark based Lending Rate (EBLR), approximately 47 lakh customers with loans amounting to Rs 8 lakh crore have increased their tenure, EMI or both in their existing home loans.

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However, experts now say that raising the tenure may not be feasible anymore.

This is because the banks typically have a tenure of up to working age of 60 years in case of home loan, hence increasing the tenure might be challenging given the number of hikes in the recent months, said Pramod Kathuria, Founder & CEO at Easiloan while talking exclusively to CNBC-TV18.com.

The central bank has raised repo rate cumulatively by 250 basis points to 6.50 percent since the beginning of the rate hike cycle in May 2022. For most banks, the external benchmark to which their home loans are linked is the repo rate. So, with the hike in repo rate, all existing home loans on floating rates of interest become expensive.

Floating interest rate is volatile and keeps on changing as per the market scenario. It depends on the base rate offered by several lenders, so whenever the base rate changes, the interest rate gets automatically revised.

Home loan numbers also take a hit

Given the situation, disbursal of affordable housing loans has also witnessed a slowdown.

On an average the proportion of home loans up to Rs 30 lakh in total loans disbursed has declined to 45 percent during January-February 2023 from around 60 percent of the total disbursals in June 2022 quarter. Moreover, if we look at above Rs 50 lakh loan, their share has increased from 15 percent to ~25 percent of the fresh housing loans during this fiscal. This indicates that

the demand for housing loans by people at the lower end of the strata, who take loans for affordable housing sector has been noticeably hit, according to the State Bank of India’s economic research department’s (ERD) report Ecowrap.

What lies ahead?

Industry experts thinks that the trend will not remain for long and affordable housing loans will soon see a growth.

"Home loan is a long tenure loan and it is expected to go through multiple cycles of high and lows, hence the recent hike should not deter the new home loan borrowers from purchasing," Kathuria told CNBC-TV18.com.

He added that buyer should remain positive considering home loan is a long tenure product, and any borrower is likely to see increase and decrease of interest rate during the full tenure of loan.

How can borrowers tackle the situation?

In this case, the bank can opt to increase the installment.

"Borrowers can request to check with bank to understand how are home loan EMIs getting adjusted. They can consider switching to a fixed rate loan rather a floating rate," Kathuria advised.

With fixed home loan interest rate, borrowers have to repay the home loan in fixed and equal installments as per the loan tenure. The advantage here is that the rate would not change even if there are fluctuations or changes in the Indian financial market conditions or trends.

Alternatively, borrowers can try negotiating with the banks, provided they have a good credit history. Other options are exploring debt consolidation, reviewing their budget and seeking financial advice.

(Edited by : C H Unnikrishnan)