Don't delay your home buying decision because of increase in interest rates

With major banks and housing finance companies (HFCs) raising mortgage rates, a number of home loan customers with floating rates will have to undertake tweaking of the calculation on EMIs (equated monthly installments).

The State Bank of India ( SBI )) recently raised its lending rates, taking its effective home loan rate to 10.25 per cent. Similarly, ICICI Bank and HDFC Bank , too, followed suit. After the latest round of rate hikes, SBI's home loan customers would pay 100 basis points (bps) above its base rate of 9.25 per cent; thus the effective rate becomes 10.25 per cent.

In the last two years, interest on home loans has gone up by at least 200 basis points (100 basis points equals 1 per cent), from about 8 per cent to above 10 per cent. A quick back-of-the envelope calculation shows that home loan rates have increased by about 25 per cent.

Realty experts are of the view that the rise in interest rate would have a compounding effect on a home buyer on a higher interest regime. "The impact of the home loan rate rise works up to Rs 50-75 per lakh of the EMI," says Amit Goenka, National Director, Capital Transactions, Knight Frank India. "This may not have any significant impact for a property buyer in metro cities, where the ratio of ticket prices to unit sale is quite high. However, it may influence buyers of properties in tier II and III cities."

Similarly, developers, too, observe that the present hike in interest rates is more of a "cyclic turn of events" that shouldn't be viewed as a cause of much concern. Mayur Shah, Managing Director, Marathon Group, "Perhaps , if the inflation is tamed, there are chances that the rise in interest rates are likely to come down. In the last 10 years from 2000 to 2010, the interest rate on home loans has shuttled between 8-12 per cent. So, for any new home buyers, I would suggest to calculate EMIs keeping in mind a 1 per cent rise in interest rate. Also, a new home loan seeker should avoid opting for a maximum loan amount offered by a bank or any financial institution. Instead, they must look forward to a maximum of personal funding ." However, for a home buyer opting for a loan less than Rs 50 lakh, a slight rise in interest rate shouldn't be a matter to worry about, he adds.

"Most home loans offered are on a floating rate basis, so the increase in home loan rates witnessed now would also ease down as the inflationary trend reverses," avers Manoj John, Vice-President , Corporate Planning and Strategy, RNA Corp. "Hence , the current increase in EMI will be followed by a pattern of decrease in months to come, and supports the reason to buy into a property that meets the buyer requirement. By delaying the purchase decision the customer also runs a risk of having to buy the same property at a higher price, if today the same is available at a good value proposition."

Source: Economic Times

Thanks and Regards,
Sanchari Sinha,
Intern at DENIP Consultants Pvt. Ltd.