With a 150-250 basis points (bps) increase in interest rates, EMIs (equated monthly installments) could go up by 12-21 per cent in case of prime home loans and 8-13 per cent in case of affordable home loans while maintaining the original tenure, as per ICRA’s analysis.
Manushree Saggar, Vice President & Sector Head, Financial Sector Ratings said: “…The impact is expected to be lower in the case of 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 per cent and hence remain manageable, unless the original loans were given at aggressive FOIRs.”
Limited headroom
Saggar noted that 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.
As per the rating agency’s estimates, HFCs have increased the lending rates by about 50-100 bps in H1FY2023 compared to the 190-bps hike in benchmark repo rates.
Also, some lenders might follow a mixed approach of changing both EMI and tenures to manage the monthly debt burden of borrowers.
Dilemma for HFCs
ICRA, in a note, observed that 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 installments (EMIs) while keeping tenures constant or do it 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, opined the rating agency.
Negative amortisation
In the case of affordable home loans, the extension of loan tenures can lead to negative amortisation, given the high interest rates, it added.
The increase in FOIRs could also be partly offset by the expected increase in income levels with the improvement in the operating environment, ICRA said.
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.