Own your dream house, now

Rock-bottom property prices, low interest rates, and the highest ever I-T rebate — all are ideal for buying residential property

by R. Nambirajan

OWNING a house was never easier. There are several reasons now. After the recession in the housing industry, the property prices have bottomed out and the prices prevailing now are the cheapest.

More importantly, the housing loan interest rate has come down substantially and it is the lowest now. At present the interest rates being charged by most of the housing finance companies for loans up to 10 lakh is 13 per cent. Commercial banks also are charging similar rate of interest for housing loan above Rs 2 lakh.
Last, but not the least, you get a saving in your net salary on account of rebate in income tax if you are paying income-tax, and it is very substantial now.

Under Section 24 (1 (vi) of the Income-Tax Act, an individual can claim a tax relief of up to Rs 1 lakh. The loan for a house for self-occupation should either have been availed after April 1, 1999, or it should be acquired before April 1, 2003, though.

Under Section 88 of the Income-Tax Act, which deals with rebate on life insurance premium, contribution to Provident Find, subscription to NSCs, etc, repayment of the amount borrowed (towards principle amount) up to a sum of Rs 20,000 for the purpose of purchase or construction of a residential house can also be included under the claim for rebate under this section.

However, tax benefits have a ripple effect on effective interest rates also. If we take into account the benefits available under the Income-Tax Act, the real rate of interest (i.e. net interest payment after adjustment of tax benefits) work out to less than 8 per cent where the borrower is under 30 per cent tax bracket, and to 9 to 10 per cent for persons in tax slab of 20 per cent, depending upon the loan amount in the initial years.

However, the effective cost will go up towards the later years since the interest amount will be decreasing. Thus, even if an individual has enough funds available for purchase/ construction of a house, it will be prudent for him to go in for availing housing loan for getting the tax benefits, and invest his own funds in other avenues/ banks deposits to get better returns.

Of course, the benefits may vary depending upon whether one opts for a fixed rate of interest or a floating rate of interest. Under fixed rate, the interest rate is fixed for the entire period and the HFC bears the the interest rate risk.

Under floating rate, the borrower has to take the interest rate risk: If there is any increase in the rate of interest, the borrower has to pay additional interest and vice-versa. A risk worth taking, indeed. At least, some recent customers would testify.

(The author is the managing director of PNB Housing Finance.)