Not really. For starters, a low interest rate on home loan can be relevant only if you opt for a fixed rate home loan. In this case, the rate remains fixed throughout the tenure of the loan. So even if interest rates were to move up in future, you can benefit from the low rate your loan carries. But again, interest rates can move downwards as well. So you are putting yourself at risk. It is for this reason that a majority of people opt for floating rate loans. RBI rate cuts do not make much of a difference if you have a floating rate loan. This is because over the full loan tenure, your home loan interest rate may move up or down several times depending on the economic situation. Therefore although a rate cut can reduce the cost of home purchase theoretically, in reality the rates can be increased again during the loan tenure. A fall in policy rates improves sentiments in the real estate market. This is also used as a marketing tactic by many builders to push sales. But should you really base your purchase decision on this one factor? We don’t think so, based on the argument above.

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? 

Remember that a home loan will probably be the largest debt in your life. So do not make your home purchase decision solely based on temporary relief you may get by a lower policy rate. This can at best be a positive sentiment supporting other factors behind your home purchase resolution.

India’s central bank, Reserve Bank of India (RBI) cut the repo rate to 6.75%, down by 50 basis points on September 29th last month. This is the rate at which RBI lends to banks and is a key policy rate of the economy. For many years now, it is considered that a rate cut by RBI will automatically trigger growth. And yes, boost real estate demand. While this is true, it is not as simple and straightforward as it sounds. There are many layers to this argument, which can be a part of another discussion. But let’s look at real estate in particular here. When does a RBI rate cute actually spur real estate demand? And should you base your home purchase decision solely on this action of RBI?

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.
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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?