Home Loan: Are rising interest rates affecting the affordable housing sector?

Home loans are one of the most powerful credit facilities available today as they aid people in possessing their own residence. However, in recent years, home loan interest rates have been rising gradually. This has affected all existing borrowers and those who were planning to avail a home loan.

The affordable housing segment has been impacted negatively due to rise in home loan interest rates.

Why are home loan interest rates rising?

Some home loan lenders chose to hike the Marginal Cost of Funds Based Lending Rate (MCLR) in August. The list included some of the biggest names in the banking sector, such as ICICI Bank, Bank of India, HDFC Bank, Bank of Baroda, and Canara Bank. The interest rates for loans linked to MCLR have gone up, including home loans. This has increased the financial burden on home loan borrowers.

Earlier, home loan rates increased rapidly due to six consecutive rate hikes by the Reserve Bank of India (RBI). Between May 2022 and March 2023, the interest rate on housing loans increased from 6.5 per cent to 9 per cent. At that time, some lenders as well as real estate players expressed their fear that it could lower demand in the affordable and mid-range housing segments. Now, it seems that their worries have become a reality.

Impact of rising interest rates on the affordable homes segment

According to an August report by Anarock, affordable home loan borrowers have been repaying almost 20 per cent higher EMIs since the last two years. The rising interest rates for housing loans have lowered the sales of affordable homes. The report mentioned that the share of affordable housing in overall sales was 20 per cent in H1 2023, indicating an 11 per cent decrease as compared to the same period last year.

Out of 2.29 lakh units sold across the top 7 cities in H1 2023, only 46,650 units or 20 per cent were affordable homes. In the same quarter last year, 57,060 affordable homes were sold out of a total 1.84 lakh housing units sold.

Possible fallout of decline in demand for home loans in affordable housing segment

The affordable home sector comprised 18 per cent of the overall sales in the housing sector, compared to 23 per cent last year. The report mentioned that the interest payable for a 20-year tenure is now more than the principal amount and this has increased the financial burden on borrowers. People with limited income sources have been the worst affected.

Luxury homes segment has not yet seen a decline in demand, but high interest rates could put a dampener on the sector’s growth as well. The demand in affordable housing segment could take a big hit if the persistently high interest rates prevail.