If you’re planning to take a home loan, here are a few key pointers that you must keep in mind.
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While some would have expected the Reserve Bank of India to the cut the repo rate which would have further reduced the home loan interest rates, the high levels of inflation have dictated the central bank keep the key policy rate unchanged at 4%, as announced by Governor Shaktikanta Das at the end of the MPC meeting on Friday. This move, largely on the line of economists’ expectations, comes at a time when the central bank has already reduced the repo rate by 115 basis points since the beginning of 2020.
While the economy continues to reel under the adverse impact of the Covid-19 pandemic which might lead to a GDP contraction of 9.5% in the current financial year as predicted by the RBI, Governor Das also remarked, “Silver linings are visible in the flattening of the active caseload curve across the country… Barring the incidence of a second wave, India stands poised to shrug off the deathly grip of the virus and renew its tryst with its pre-COVID growth trajectory.”
Amid this background, however, there were a few announcements made that are aimed at spurring the credit demand, especially for individual home loan applicants. So, if you’re planning to take a home loan, here are a few key pointers that you must keep in mind.
1. Home loan interest rates to remain low in the near future
The central bank’s decision to keep the repo rate unchanged at 4% would ensure that the interest rates of repo-linked floating home loans would continue to remain at record-lows for at least some more time. Already many banks are offering these repo-linked loans starting at under 7% p.a. and the latest announcement will continue this trend. So, many aspiring homeowners might find the current scenario of low rates conducive to finalise their home-buying plans. However, they should understand that their actual interest rate would depend upon their lender, age, income, gender, credit score, the loan amount and the loan-to-value ratio. They should also keep in mind these repo-linked loans would see an immediate and proportional upswing whenever the RBI hikes the repo rate in the future.
2. Homebuyers could now get bigger retail loans
Retail and small business loans can now be up to Rs 7.5 crore from the earlier limit of Rs 5 crore. The new limits will apply to new loans as well as on incremental exposures on existing loans. This step will allow individuals and small businesses to take bigger loans for their ongoing needs.
3. Risk weightage norms relaxed
For every loan given, banks must set aside a percentage of the loan in order to maintain solvency. This is the risk weightage. The riskier the lending, the higher the weightage. The percentage was earlier decided by two factors: the size of the loan and the loan-to-value (LTV) ratio. The LTV in a home loan is the percentage of the property cost the bank will finance while the rest needs to be financed by the buyer. After today’s decision, for home loans, the risk weightage will be done basis only LTV, and capped at 50% where the LTV is higher than 80% for all new housing loans sanctioned until March 31, 2022. The RBI expects this will free up more of the banks’ capital for real estate lending to spur growth.
A few other key considerations
Improve and maintain a good credit score: Aspiring homeowners must realise that the best home loan offers are usually reserved for applicants with credit scores over 750-800. As such, they should check their credit scores before applying for a loan, and take corrective measures to improve it if their scores are lower. They should also keep a tab on their credit scores throughout the loan tenure as any substantial dip would result in pricier EMIs until their score improves.
Ensure availability of adequate margin money: Not all expenses related to a home purchase are covered by loans. These include registration and stamp duty charges, furnishing costs, etc. which could easily add up to 15-30% of the property’s base price. So, they should ensure they have this margin money at their disposal to avoid any unpleasant surprises later on. Also, this margin money should ideally not impact their other equally important financial commitments like emergency funds, insurance premiums, essential investments, etc.
In conclusion, while the RBI’s latest announcements are aimed at boosting the demand for home loans, aspiring homeowners would be well-advised to think it through before finalizing their decision about possibly their life’s biggest investment. They should ensure they have a proper repayment plan while aiming at making as much part prepayments as possible to become debt-free faster while the interest rates remain low.