Home loan EMIs have to be revised upwards due to limited headroom to increase tenure: ICRA

Following a 190 bps rise in repo rate, the rate at which banks borrow from the Reserve Bank of India, interest rates on home loans have gone up too. However, many of us haven’t felt the pinch so far due to a rise in tenure instead of EMIs by lenders. However, post multiple rate hikes any further hike can lead to a jump in EMIs as loan tenure has already crossed the working age of many borrowers.

According to the ICRA, a rising interest rate scenario presents a dilemma for housing finance companies (HFCs). To deal with the situation, mortgage lenders normally increase the equated monthly instalments (EMIs)while keeping tenures constant or  vice-versa.  Lenders usually extend the tenure first to keep the borrower's monthly debt burden in check. However, there is limited headroom to increase the tenure as incremental loans in the prime home loan segment already have long tenures and a further extension in loan tenures will lead to overall tenures extending beyond the working life of the borrower. In the case of affordable home loans, the extension of loan tenures can lead to negative amortisation, given the high-interest rates.  

“Overall, while there is an expectation of a further increase in interest rates, lenders have limited headroom to increase loan tenures; thus, EMIs would have to be revised upwards. However, this is unlikely to impact the HFCs asset quality indicators significantly,” said Manushree Saggar, Vice President & Sector Head, Financial Sector Ratings, ICRA.

HFCs have increased the lending rates by about 50-100 basis points (bps) in H1FY2023 compared to the 190-bps hike in benchmark repo rates. Saggar added,  “As per ICRA’s analysis, with a 150-250-bps increase in interest rates, EMIs could go up by 12-21% in case of prime home loans and 8-13% in case of affordable home loans while maintaining the original tenure. The impact is expected to be lower in the case of the affordable home loan segment vis-à-vis the prime home loan segment since those loans are already at high rates. However, even with revised EMIs, the fixed obligation to income ratio (FOIR) is expected to increase by less than 10 percentage points and hence remain manageable, unless the original loans were given at aggressive FOIRs.”

The ICRA report also states that the increase in FOIRs could also be partly offset by the expected increase in income levels with the improvement in the operating environment. Additionally, the asset quality for home loans benefits from the fact that home loan EMIs get priority over other obligations as loans are mostly taken for self-occupied houses. Also, lenders may not pass on the entire increase to the end borrowers given the competitive market space and thus the impact on EMIs could be further limited.

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