Bankers believe that the increase in interest rates will have an impact on demand for housing. The end-user will continue to buy but investors may put on hold their plans to invest in real estate.
For existing as well as new buyers, the hike in interest rates will impact them in the long term. A year ago, banks were offering home loans at around 9% which has increased to 10%. The 1% hike may sound small but, as anyone who has taken a home loan knows, the total interest goes up by 13% or more, depending on the period of the loan.

For example, for a customer who has taken a home loan of Rs1 lakh for 15 years, the EMI increases by 6% if banks increase interest rate by 1% or 100 basis points? At 9% interest rates, the EMI comes to around Rs1, 015. The EMI rises to Rs1,075 if the rate increases to 10%. The interest burden on the end user goes up by 13% during the 15-year repayment period. Similarly, a customer taking a loan for 20 years has to pay 13.65% more as interest. The end-user, who is in urgent need of a house, will not care about the hike in interest rates, said SK Das, general manager of Bank of Baroda.

"It is true that interest rates have gone up and may rise further in the near future, but it will not change the plans of an end-user who has already decided on buying a house. He is ready to pay more instalments of EMI and higher amounts as well," said Das.

But Das also believes that investors may put their plans of buying real estate property on hold. "Investors are not our target. We are focusing on end-users," he said. BB Joshi, zonal manger of Bank of India, said that the impact will be felt to a certain extent.

"We are hoping that due to fall in demand for home loans, developers will reduce prices. The end-user will not change his plans. But investors, who are pumping in money in real estate, will certainly think twice," he said. With continuous hike in interest rates in the last one year, the end-users' capacity to purchase a house has been put under strain, said CGM of SBI, P Nanda Kumaran.

"A consumer, who had decided to buy a 3 BHK flat for Rs45 lakh, may now opt for a 2.5 BHK or 2 BHK flat that costs Rs40 lakh or less. This will further impact the property market in city," he said.

The real estate industry is now likely to witness an indirect impact of the rate hike soon, said Nanda Kumaran.

"If developers do not reduce prices, customers will not be able to buy. The widening of demand-supply gap will force realtors to reduce prices," he said.

But, Irfan Koreishi, general manager of Housing Development Finance Corporation Ltd (HDFC), Gujarat circle), says that the hike in interest rate is marginal.

"Five years ago, the interest rates were around 13% which came down to 7% two years ago. Now, it has increased to around 10% again. Despite this volatility, people have continued buying houses in Ahmedabad," he said.He further said that the customer does not hesitate to pay Rs1,000 to Rs1,500 more as EMI. "The demand for real estate will be affected only if realty prices shoot up," said Koreishi.