The home loan interest rate is an important factor in your home-buying decision. Often, the interest is the biggest cost in the home purchase. For example, on a loan of Rs 50 lakh for 20 years at 7%, the total interest comes to Rs 43.03 lakh. We’ve enjoyed two years of rock-bottom home loan rates. But now the interest rate cycle is turning. In a short span of five weeks, the bottom has risen from 6.40-6.80% by 90 basis points to 7.30-7.70%.
The rate hikes were triggered by rising inflation. Floating home loan interest rates are benchmarked to the RBI-mandated repo rate. With hardening inflation, the repo has quickly risen to 4.9%. It’s expected to continue to rise towards 6% unless inflation is tamed. The question for people looking to buy a home is this: in this scenario, does it make sense to buy a home as borrowing costs escalate? Before deciding, buyers should keep the following things in mind.
Home-buying is a capital-intensive process. Financial readiness is critical. If a home costs Rs 100, you also need to factor in additional costs such as GST, stamp duty, registration, legal checks, furnishing, brokerage, financing, packing, and moving. All of this may easily drive up the price to Rs 120. But in most cases, you’re likely to get a loan of 80% of the base price plus GST. This would be around Rs 85. The rest must come out of your pocket. So, you’re looking to pay at least Rs 35 from your savings. If you’re ready with this money, only then can you get the loan.
Occupying or investing?
You can buy for self-occupation, or you may be just investing in the property. The former makes more sense when you’ve decided to build your life in one location. If not, you may want to reconsider. Second, as an investment, you must compare real estate with any other investment option such as mutual funds, stock markets, or provident fund. Real estate as an investment destination has struggled these last few years, and as per RBI data, the annual returns are less than a savings account. Add to that the costs of maintenance, property taxes, and loan interest. In most cases, the real returns from real estate are negative. Therefore, the risks are too high, and the rewards too low.
Income stability required to pay loan
In a high-inflation scenario, your financial stability is threatened in various ways. Your living costs are going up. Your investment returns are volatile. There may even be income and job uncertainty. It is very important to have stable income and repayment capacity when taking a big loan. Also, the home purchase should not jeopardise your emergency fund which you need for eventualities such as a job loss or health emergency. You may even need this fund to ensure EMI payments after a job loss. Ideally, your EMIs should not exceed 30-40% of your monthly income.
In the current scenario, you also need to budget for your home loan rate increasing substantially from around 7% now to around 9% by 2023. But if you have the income stability to get through this phase of volatility, you shouldn’t let the macroeconomic scenario frustrate your home-buying plans.
Tips to pre-pay the loan
The rising inflation may take time to soften, but the RBI will continue to intervene by increasing interest rates. If you take a new loan now, it’s likely your tenor will increase with a rate hike. You must have a plan to deal with the increasing EMI burden. If you are comfortable, increase your existing EMIs to reduce the loan tenor. You could pre-pay 5% of your loan balance every year. Or you could make strategic lump-sum payments that lessen the burden of the additional months added to your loan by the rate hikes.
In summary, while the economic scenario is adverse and interest rates are rising, what really matters is your personal, financial readiness. If you have the funds, the credit score, and the income stability, go for your purchase. If not, delay your decision till you’re ready.
(The writer is CEO, Bankbazaar.com)