Home EMIs swing little with rates

Small rate hikes have no impact on outgo.

The hardening of interest rates on housing loans is unlikely to burn a hole in your pocket. HDFC's decision to raise its fixed rate from 7.5 per cent to 7.75 per cent last week will raise your equated monthly instalments (EMI) by Rs 13 per lakh if you are going for a 10-year loan, Rs 14 on a 15-year loan and Rs 15 on a 20-year loan.

So, if you were planning to take a Rs 10 lakh housing finance loan for a period of 10 years, your EMI at 7.75 per cent interest would work out to Rs 12,000 against Rs 11,870 when the interest rate was 7.5 per cent, a rise of only Rs 130.

Even if the rates were to climb further and hit 8.5 per cent, your EMI would be impacted by Rs 53 per lakh on a 10-year loan, Rs 58 on a 15-year loan and Rs 62 on a 20-year loan. (See chart) In this scenario, the increased outgo on a 10-year Rs 10 lakh loan will be Rs 12,400,  a rise of Rs 530.

What is more, customers do not expect the hard interest rate regime, led by a rise in inflation, to last for long.

This is reflected in the fact that in spite of the hardening of interest rates, a majority of housing finance customers are still opting for floating rate home loans instead of fixed-rate loans.

Leading players in the housing finance business like HDFC, ICICI Bank and the State bank of India said 80 per cent of their customers still wanted floating rate loans.

"The change in the interest rate is just notional and there has been no real increase in rates. Also, there is still a gap of 50 basis points between the fixed and variable structures, and it will take quite some time before variable rates to exceed the fixed structure," Rajiv Sabharwal, COO of ICICI Bank Home Loan, said.

"Our variable interest rate is 7.5 per cent, and most customers do not see any hike in the short term. Even if it increases by 25-50 basis points, the increase will just be Rs 25-30 per lakh of loan. Customers still want to ride the swings in the interest rate cycle and take variable rate loans," Renu Sud Karnad, executive director, HDFC, added.

In fact, such has been the demand for floating-rate loans that PNB Housing had to discontinue its fixed-rate scheme in the last quarter.

Realty experts point out that given the high returns from residential real estate in the last few years, many buyers are still willing to take their chances with floating rate loans.

"In the last 10 years, the returns have been in excess of 30 per cent. Thus, for a speculator, the risk is still worth taking with a floating rate," a large real estate investor told Business Standard.