Housing demand for young buyers is surging with the interest rates on home loan going on the downside. After the demonetisation of high-value currency notes, banks have now started cutting lending rates. SBI was the first to cut the rate, which was followed by several other banks.
Though the last year had shown a slower demand for house purchase, but the running year is giving a boost to real estate. “The current rate reduction by leading banks will take home loan interest rates to its lowest point in the last ten years. Other banks can also be expected to follow suit. However, banks have only reduced their MCLR-based interest rates and not of older loans lent under the base rate system till March 31, 2016,” says Naveen Kukreja – CEO & Co-founder, Paisabazaar.com.
Here are six things you must know before opting for a home loan:
Is this the right time to opt for a home loan?
An individual planning to buy a home for himself can buy his dream home anytime because there are certain standard benefits which you can avail throughout the year. However, yes, it is the right time to buy a property if you are likely to buy in the near future because the lending rates are precisely getting cheaper after the demonatisation move taken by PM Modi.
“Having said that, home loan rates are at the lowest point in six years (SBI slashed its home loan rates to as low as 8.5%), and hence it is a great time to avail a home loan if you’ve found your dream home. However, if the objective of taking a home loan is for investment purposes, it may not be the best time as there may be some correction in the real estate market,” says Kukreja.
How would it benefit home loan consumers?
The benefit is limited to a specific segment of customers. New customers who want to buy a home for their selves as a residential property can be benefited the most compared to other buyers who have either taken a loan recently or is likely to buy a property for investment purpose only.
Also, “borrowers paying interests under the older base rate system will not benefit from the current rates. Even, most existing borrowers under the MCLR-system will not benefit much as most of the home loans have an interest reset date of six months to 1 year. For example, if you had taken a loan linked to 1-year MCLR in November 2016, your loan rate will be reset only in November 2017. Thus, only a section of home loan borrowers availing home loans between April 1, 2016, and June 1, 2016, will benefit from the current rate cuts,” says Kukreja.
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Is this the right time for consumers to switch to MCLR regime from base rate?
Keeping the operating cost and CRR constant, the lending rate on loan component under base rate regime is calculated on the cost of fund and margin while under MCLR it is calculated on the basis of the marginal cost of fund and the tenure of premium being paid during the loan duration.
“As MCLR ensures better transmission of reduced rates than base rate and RPLR systems (as evident from the recent rate cuts by banks), it is always a right time to switch to the MCLR regime. Under the MCLR regime, banks have to mandatorily review their MCLR every month under regulatory compliance. There is no regulation of monthly reviews for the base rate and RPLR-based loans. Moreover, banks have to specify interest reset dates to you while lending to you. The borrowers under the base rate and RPLR system do not enjoy the privilege of fixed date of interest rate resets,” says Kukreja.
Is there any possibility of switching the regime system?
Yes, there is a possibility of switching from base rate to MCLR regime, but that includes several charges which differ from bank to bank. The charges can affect your loan rate as well.
“The best course of action for such borrowers is to negotiate with the existing banks or go for a balance transfer with a different bank to make the most of the existing rate cut. I would recommend them to log on to online financial marketplace such as www.paisabazaar.com for comparing and choosing amongst various balance transfer options,” says Kukreja.
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Things that consumers should keep in mind while availing home loan
The most important thing is to ensure that you can afford the EMI and down payment required to purchase the home and also the stamp duty levied. The next important thing is to find out which banks or HFC’s would approve the loan on the project that you’ve decided on. Once that is sorted, the interest rate on your loan, loan tenure, any other processing charges, any prepayment restrictions or charges is important to understand and optimise. Your loan tenure, disposable income and EMI amount are inter-dependent. A shorter loan tenure will result in higher EMI amount but lower interest payout. Remember that lenders prefer your EMI amount to be within 40% of your monthly disposable income. Home loans from commercial banks should be preferred as they follow the MCLR- based interest rate, says Kukreja.
Are there any tax benefits on home loans?
You can avail deduction under section 24, 80C and 80EE if you are buying your home for the first time. Other than that, you can avail the benefit from section 24 and 80C only. Home loan principal repayments can avail the deduction up to Rs.15 lakh under section 80C.
“A maximum deduction of Rs 2 lakh is available under Section 24 for interest paid for a self-occupied property. An additional deduction of Rs 50,000 on home loan interest is available under Section 80EE to first-time borrowers under certain conditions prescribed in the I-T Act,” says Kukreja.