If banks were to increase lending rates by another 25 basis points in future, loan EMIs would increase by 200 basis points (2%), says the latest report by Motilal Oswal Financial Services.
The analysis by the financial services company comes at a time when the RBI is expected to announce further hike in the repo rate, at which the banking regulator lends funds to banks in India. After each hike by the RBI, financial institutions announce interest rates hikes.
According to the report, lending rates have already risen 170 basis points (1.7%) in the past six months, leading to a 15% rise in EMIs or a 10-year increase in the tenure of an Rs 1 crore home loan. Demand started to be impacted after the initial 150-175 basis point hike itself, the report indicates.
Impact of 25-bps hike in home loan interest rates on EMIs
| Parameters | Scenario 1 | Scenario 2 | Scenario 3 |
| Ticket size | Rs 50 lakh | Rs 1.5 crore | Rs 3 crore |
| Loan-to-value ratio | 80 | 70 | 50 |
| Loan value | Rs 40 lakh | Rs 1.1 crore | Rs 1.5 crore |
| Interest | 8.5% | 8.5% | 8.5% |
| Tenure | 240 months | 240 months | 240 months |
| EMI | Rs 34,713 | Rs 91,212 | Rs 130,173 |
| Impact of 25 basis point hike in interest rate | |||
| Interest | 8.8% | 8.8% | 8.8% |
| EMI | Rs 35,348 | Rs 92,790 | Rs 132,557 |
Source: Motilal Oswal Financial Services
Property prices increase 5-8%
The report also highlights that property prices across cities have increased by 5-8% on an average during the quarter, which, along with the impact of interest rate hikes, have reduced affordability by over 20%.
Demand remains robust nonetheless
The hike in lending rates and average prices notwithstanding, the demand for housing in India remains robust, the report says, adding that it may remain strong till rates rise by another 75-100 basis points or until lending rates cross the double-digit mark. Recall here that some banks in India are currently charging more than 9% interest on home loans from specific borrower categories.
Along with high construction costs, rising interest rate scenario may impact positive buyer sentiment in the near term, resulting in larger developers further consolidating their market share.
Top-12 players halfway through FY23 guidance
The repo also points out that the top 12 listed companies in India saw an 8% quarter on quarter and a 29% annual growth in pre-sales during the September quarter. In volume terms, these companies cumulatively reported just 3% YoY growth during the 3-month period ended September 30, 2022.
“In first half of the financial year 2022-23, the top 12 listed companies clocked pre-sales of Rs 315 billion, up 85% YoY, but down only 6% from 2HFY23 levels, despite a 170-basis point rise in mortgage rates. With this, most companies are halfway through their FY23 pre-sales guidance,” the report adds.
“While companies remain positive on the pricing trajectory ahead, they are also considerate of the impact on EMIs due to interest rate hikes on affordability,” it says.
