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Finally,light at the end of the tunnel for borrowers

The policy signals by the central bank indicate that interest rates may start coming down soon. Home loan borrowers yet to take the plunge should wait a little longer

For people hit by the double whammy of inflation and high interest rates,the Reserve Bank of India’s last week’s statement that “from this point on,monetary policy actions are likely to reverse the cycle” was music to the ears.

Why’s it so? Last 24 months were marked by high inflation and subsequent steps taken by the RBI to counter it by raising interest rates. The RBI started hiking rates from March 2010. However,due to the huge consumer demand in India and supply-side pressures there was no impact after the initial hikes.

No one,in India or outside,had imagined the rate hikes to be so severe. The RBI hiked rates 13 times on the trot. While this led to a huge outcry from corporates due to increasing input costs,common people were the biggest losers. The equated monthly installments (EMIs) on car,house and personal loan went beyond levels which could be managed just by minor budgeting.

Those who had already locked themselves in a housing loan saw the loan tenure increase from a normal 20 years to 30 years. Those who kept waiting hoping for the interest rates to come down so that they can go ahead with their purchase did not know that the wait could be much longer than they anticipated.

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The pause came last week after the clear signs of inflation coming down. It was a source of relief for lot of people who had postponed their purchase for an indefinite period. Now experts expect the cut to start by the end of the fourth quarter of this fiscal or the first quarter of the next fiscal.

Interest rate impact

When the interest rates go up,it impacts a borrower in two ways. First,the eligibility of a borrower for a loan goes down and secondly the EMI amount goes up.

The interest rate currently being offered are in the range of 12 to 13.5 per cent which is in a stark contrast to the 8 to 9 per cent offered in 2008-09. Due to the decrease in the total money a borrower could get along with increased outgo,a number of people delayed their property purchase which showed in the slowing down of sales.

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The risk of passing on the loan repayment to the next generation also became a distinct possibility. You may have taken a loan at the age of 35,hoping to finish repayment by the time you retire from service,but your son may end up paying the EMI and finishing off the loan as high interest rates are now pushing up EMIs and tenures.

The impact was not only on the people but also on the builder community. “There is a dire need of liquidity in the market and IIP slow down is also resulting due to slow down in construction sector. Reserve bank ought to take note of need of liquidity and interest rate reduction at the earliest,” said Lalit Kumar Jain,National President,Confederation of Real Estate Developers’ Associations.

Timing the interest rate cycle

According to experts,the rate cut by the RBI would be gradual and take a long time to come back to the previous lows. Buying a property is a time-consuming process which involves several months of research and finally deciding on a property. Looking at the trends of the property rates in the past few years,it shows that the rates in most of the cities,although slowed down,have not stagnated. This calls for a careful strategy by the borrowers. If one is buying home for self-consumption then it may be prudent to go ahead with the purchase advise experts.

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“Home loan is a long term contract. The floating rate interest rate would take care of the EMIs once the interest rate comes down,” says Suresh Sadagopan,CEO,Ladder7 Financial Services.

“With the property rates going up with every passing year one must take a calculated call between the interest rate-property price tradeoff. If the property becomes expensive even by 10 per cent in one year,waiting can end up as a bad decision,” advises Vinay Singh,a Mumbai-based real estate expert.

However,those who are looking to invest by taking a home loan may do well to wait till the interest rates come down. “Home loan should ideally be taken only for self-consumption. If someone still wants to go for it,waiting for the lower interest rate regime is a good option,” suggests Sadagopan.

Those stuck because of eligibility issues can either look for a cheaper option or wait for some more time. “If a buyer is stuck because of eligibility issues then s/he may do well to wait for another 12 months after which there could be some significant lowering of interest rates would show,” says Satkam Divya,Business Head,Rupeetalk.

There are some lenders offering a fixed interest rate for initial 2-3 years. With the interest rates likely to come down in near future,locking at some fixed rate may not be a good option. While there is likely to be lot of noise about the optimism which may come in once the rate cuts start,timing the interest rate cycle is not a very good strategy.

— ritukant.ojha@expressindia.com

The U-Turn will come soon

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* Those who are looking to invest by taking a home loan may do well to wait till the interest rates come down.

* There are some lenders offering a fixed interest rate for initial 2-3 years. With interest rates likely to come down,locking at a fixed rate may not be a good option.

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* Those stuck due to eligibility issues can look for a cheaper option or wait for some more time.

First published on: 19-12-2011 at 03:10:48 am
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