Executive Summary : Many individuals base their home purchase decision on the fall in policy rates announced by RBI. However, despite this bringing about positive sentiment, it is not a permanent reduction in cost of funds, unless you opt for a fixed rate loan. You must consider other factors such as need to buy, affordability and real estate prices before you can decide to buy your new home.
Firstly, RBI’s rate cut does not translate to anything to the common man, unless commercial banks cut their lending rates as well. You may think that once RBI reduces rates, banks should logically reduce their rates too. Again, it is not so simple. There are several factors which banks take into account before they decide to reduce their lending rates. Therefore, this action may not be as quick as you expect it to be.
Now, assuming your bank also reduces its home loan rates, it means if you borrow from this bank to purchase a house, your monthly Equated Monthly Instalment (EMI) amount will be lower. For example, say you wish to buy a property worth Rs. 1 crore. Assuming the bank will lend you Rs. 80 lakhs at an annual interest rate of 11% for 20 years tenure, your EMI stands at Rs. 82,575. Now supposing the bank reduces its home loan rate to 10.6% per annum, your EMI for Rs. 80 lakhs on a 20 year loan will now fall to Rs. 80,408. That is a saving of Rs. 2,167 per month, saving Rs. 5.19 lakhs over the 20 year period. This is no doubt a significant amount that is saved. Potential buyers are therefore motivated to fast track their purchase decision, before banks begin to increase the rates again. But is this applicable in all cases?
Buying a house is an important decision, mainly because of the investment outlay. You must therefore decide on whether or not to buy a property looking at other factors as well.
- First, consider if you really want to buy a house. If you are paying a high rent, it will make sense to buy a house and pay the same amount as EMI on the loan.
- Affordability is an important criterion - does your wallet allow you to buy the house at that point?
- Consider the real estate prices and if there is any expectation of a likely fall in prices. Do your research well.
- Explore if builders are offering any schemes or reducing prices to offload supply. If yes, are they really beneficial to you or are there any hidden costs?