Why Rising Oil Prices Could Keep Your Home Loan EMI High?

Key Takeaways

• Oil price rises have sent bond yields skyrocketing across the world, making mortgage borrowing expensive for Indians and other global citizens.
   
• Previously, markets expected the Federal Reserve of the USA to cut rates twice during 2025. Now, the expectation is that the rates will either be sustained or hiked due to oil-related inflation.

Oil Prices Are Up. So is the Cost of Your Home Loan.

The new scenario is that oil prices determine global bond yield movements, whereas oil prices were previously linked mainly to energy prices. In simple terms, higher oil leads to increased global bond yields. 

Increased global bond yields increase borrowing costs globally, which affects Indians as well. For instance, 10-year US treasury yields have risen above 4.47% compared to around 4% in the previous weeks (before the escalation in the Iran conflict). 

Average 30-year US mortgage rates stand at 6.37%, compared to less than 6% in February.
For India, the significance of global yield movements is through foreign capital flow. 

Whenever yields in the United States rise, there are foreign capital outflows from developing countries like India. This weakens the Indian rupee and pushes Indian yields up as well.

How will this affect an Average Indian?

It is important to note that India imports more than 85% of its crude oil requirements. Elevated international crude prices translate to increased domestic inflation, which forces the RBI to retain high-interest rates. 

Here is how this will affect India in the short term:

On a positive note, India has continued diversifying its source of crude oil imports, with reduced prices. There may be a sharp fall in global crude prices, which enables the RBI to cut rates, assuming a diplomatic settlement of the Iran issue.

What is the Expert View? And what should you do?

Bob Elliott, chief executive of Unlimited Funds, explained, “At this stage, almost every bond market in the world is trading in tandem with oil prices”. 

According to him, the impact is insidious in the sense that higher oil prices lead to higher borrowing costs at the same time, which reduces household spending power.

John Canavan, lead global economist at Oxford Economics, warns that if yields cross 4.5%, mortgages will become costly. 

He says that yields may decline in the event of the opening of the Strait of Hormuz, “This tug-of-war should continue until a solution is found between the United States and Iran”.

Analysts at UBS still expect the Fed to reduce rates sometime in 2025. According to them, US inflation will ease to 3.3% by the end of 2025. However, they warn that “The market underestimates the risk to growth”.

The Indian Investors and Borrowers should avoid taking floating-rate home loans at present. If you are already taking a home loan, try to lock in at a fixed rate (if your bank allows). Monitor oil prices and RBI announcements in the coming two quarters carefully.

Conclusion

Oil and bonds are now inseparable in their relationship. We can expect high-interest rates on borrowings (globally and in India) until geopolitics keeps crude prices elevated. Only when oil prices ease will borrowing get easier.

FAQs 

Why doesn’t the EMI of my housing loan decrease despite the RBI mentioning rate cuts?

There will be no immediate reduction in the EMI amount of a housing loan since banks make changes in their interest rates slowly and cautiously when the yield on global bonds increases as well as the price of crude oil rises.

What measures can I take to reduce my housing loan EMI amid higher interest rates?

In order to minimise the impact of high interest rates on your EMI amount, you could make partial payments, raise your annual EMI amount by a small margin, refinance with a lower fixed interest rate loan where possible, and avoid extending the loan period.