How home loan interest rates affect what you can afford

Most buyers set their budget by the price of the flat. For anyone taking a home loan, the interest rate decides whether that price is comfortable or a strain, and it will change several times over the life of the loan.

What half a percent does

The difference between 8.5% and 9% looks small. Take a ₹50 lakh loan for 20 years. At 8.5% the EMI is about ₹43,400. At 9% it is about ₹45,000. That is roughly ₹1,600 more every month and about ₹3.8 lakh more over the full tenure.

A higher rate hits you in three places:

• The monthly EMI goes up, which can be the difference between a 3BHK and a 2BHK.
• The total you repay over the loan goes up by lakhs.
• The loan you are eligible for comes down, because lenders compare the EMI with your income before they sanction an amount.

Where the rate comes from

The Reserve Bank of India sets the repo ratethe rate at which it lends to commercial banks. Floating-rate home loans from banks are linked to an external benchmark, which for most banks is the repo rate. When the RBI cuts the repo rate, your loan rate comes down after the next reset. When it raises the rate, your EMI or your tenure goes up.

Both have happened recently. The repo rate was held at 4% from May 2020, and home loans were unusually cheap. The RBI then raised it in steps to 6.5% by February 2023 to control inflation, and borrowers on floating rates saw their EMIs climb. Housing demand tends to cool when that happens.

What this means for a Hyderabad buyer

A common rule of thumb is to keep the EMI within about 30% of your monthly income. For salaried buyers looking at Gachibowli, Kondapur or Kokapet, a rise of 0.5% to 1% can be enough to push the EMI past that line. Mid-income buyers feel it most. They either delay the purchase or settle for a smaller unit.

If you are buying to rent out, compare the rental yield with your loan cost. Rents do not rise just because rates did.

Low rates also tempt families to stretch for a bigger home. That is the time to be careful, because a floating rate will not stay where it was on the day you signed.

What you can do about it

1. Compare fixed and floating rates. A fixed rate gives you a known EMI but usually starts higher. A floating rate moves with the benchmark, so you gain when rates fall and pay more when they rise.
2. Take a shorter tenure if you can manage the EMI. The EMI is higher, but you pay less interest overall.
3. Budget for a rise. Work out your EMI at a rate higher than today's and check that you could still pay it.
4. Negotiate. The first rate a lender quotes is rarely the last, and a strong credit profile gets a better one.
5. Read builder offers closely. Some Hyderabad builders advertise lender tie-ups with a lower initial rate or no EMIs for a period. Ask what the rate becomes afterwards and what happens if the project is delayed.

Should you wait for rates to fall

We would not hold off a purchase just to wait for a better rate. Nobody can predict the repo rate over a 20-year loan, and on a floating loan your rate will follow it down as well as up. The right home at a fair price in a good location matters more than a slightly lower rate on the day you sign. What you should not do is buy at the edge of what you can pay today.

You can see how relai helps with home loans on our loans page.

If you want to work out what price range fits your income at today's rates, talk to a relai advisor.