At a time when salaries aren’t expected to increase much, a reduction in home loan rates is a blessing.
The recent 0.2 per cent cut by prominent lenders, including HDFC, State Bank of India, ICICI Bank and Axis Bank, comes in the backdrop of sluggishness in home sales and discounting by developers to get stock moving. The benefit to buyers must therefore be looked at in totality.
Let’s assume a house that was going for Rs. 60, 00,000 a few months ago is now available at Rs. 55, 00,000. If you were looking to invest Rs. 10, 00,000 and borrow Rs. 50, 00,000, you can now make do with a loan of just Rs. 45, 00,000.
With interest rates hovering around 10.5 per cent a few months ago, the reduction in the loan amount along with the cut in interest rates to 9.9 per cent spells a reduction in EMI from Rs. 49,900 to Rs. 43,110. The sharp decline suddenly makes an unaffordable property, quite accessible. And that is what developers and lenders are hoping will revive deals.
Looked at in isolation, the benefits of rate reduction might not seem as significant (see tables: Trending Down and The Real Benefit). For instance, for a borrower who has taken a loan of Rs. 100,00,000 for 20 years — implying a very high interest component — the monthly EMI will reduce by Rs. 4,000 (from Rs. 99,800 to Rs. 95,800). For women, the reduction from a non-preferential rate will be higher.
However, some lenders were already offering lower rates to women borrowers and therefore the recent rate cut will only ensure parity in rate reduction.
The most significant aspect of the recent reduction, however, and with far reaching consequences, is that the rate cuts are applicable not just to prospective borrowers but also to existing home loan customers. This means you will now pay a lower EMI on your existing home loan. That’s great news for all home loan borrowers. Heightened competition among home loan providers and the entry of new players may offer some scope for negotiation on new home loan deals, all to the benefit of the buyer.
If you think a house identified by you is priced right and worth buying, it is a good time to go loan shopping. Make hay while the sun shines!
