Take advantage of the reduced interest rates offered by banks and the tax benefits to make it a lucrative deal
Buying a home is an aspiration that requires careful planning; it not only involves getting your finances in order but analysing other aspects too. From the financial aspect one needs to see if s/he has saved enough for a down payment, is the financial position stable to bear the burden of EMI each month; other factors that need to be considered are, does one have a good CIBIL rating and is it a good time to buy a home.
So what is a good time to buy a home?
Two factors are important: first would obviously be that that the market conditions should be conducive to buying a home; home prices should not be inflated, that is, one should not end up buying property at very steep rates. Second would be that interest rates at which home loans are available should be favourable to buyers. Most buyers need to take a loan to bridge the gap between the cost of the house and their savings.
In the current scenario buying a home does seem to be a good idea as the real estate prices are down and the interest rate regime seems to favour buyers. The following discussion focuses on the rate aspect.
How are home loan interest rates decided?
If you are looking at taking a loan and compare the rates at which loans are offered by various banks you will realise that there is no set rate for all banks; each bank has different rates at which they offers loans. Moreover the rates may vary as per duration and amount of the loan. Banks may also offer special rates for a special group of people like a lot of lenders are offering lower rates for women.
However apart from that certain macro economic conditions also affect the lending rates of the banks. One such factor is the Repo rate.
Repo rate is the rate at which banks borrow money from the Reserve Bank of India. A higher repo rate means that the cost of borrowing for the banks or other financial institutions is higher; this means they will have to lend at higher rates to recover the cost.
With a lower repo rate banks can afford to give loans at lower rates to its customers without compromising its profitability. Lower rates can attract new customers and it is a win-win situation for both the bank and the customer. When RBI lowers rates banks may choose to pass on the benefits to its customers. For existing customers this may not sound so interesting if the bank does not adjust their interest rates for them; in such a scenario they can opt for a home loan balance transfer after considering all the advantages and disadvantages.
So why is it a good time to take a loan?
From a customer’s point of view the interest rate at which s/he borrows is very important as it affects the monthly outflow in the form of EMIs and also the overall interest burden. On September 29, 2015, RBI reduced the repo rate by 0.5 per cent to 6.75 per cent which is more than what was expected by the market. Whether banks reduce rates following such an announcement or not, or by how much they reduce is a bank’s decision. State Bank of India reduced its rates by 40 basis points for existing borrowers and ICICI reduced the rate by 35 basis points. Though the entire benefit has not been passed by the banks to the customers, even a small change does affect the EMIs.
Just consider this example:
For a loan of Rs 25 lakh, EMI @ 9.7 per cent for 30 years would be Rs. 21,837 and total yearly outflow would be Rs 256,645. If interest rate is reduced by 40 basis points (0.4 per cent) to 9.3 per cent the EMI becomes Rs. 20,658 and the yearly outflow is Rs 247, 890. Just consider the overall benefits spanning the entire loan duration.
Taking a home loan offers some tax benefits
Irrespective of the time at which you borrow, a home loan comes with some tax benefits. The first being the interest component in the EMI can be claimed as a deduction for calculating your tax outgo. Second benefit is that the principal component of the EMI can also be claimed as a deduction under Section 80C subject to maximum of Rs 1.5 lakh. Besides this payment made towards stamp duty and registration charges can also be claimed under Section 80C in the year in which they are made.
So if you want to buy that house of your dreams then look for the right time and make use of the reduced rates offered by banks and the tax benefits to make it a lucrative deal.
Photograph: See-ming Lee/Wikimedia Commons
The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.