Go ahead,do not time the interest rate cycle

Policymakers believe that inflation is the by-product of growing demand in India and the only possible way out is to curb demand by increasing the interest rates. This has led the Reserve Bank of India to hike key policy rates eleven times consecutively. Since home loan lenders cannot absorb the rate hikes,they pass it directly to the borrowers resulting in higher interest rates and hence higher equated monthly instalments EMIs. The home loan interest rate which was in the range of 8 per cent to 8.75 per cent an year ago,now hovers around 10-10.5 per cent. Its biggest impact is on the eligibility of a borrower. Borrowers will now have to adjust their budgets to meet the increased outflow. Over the past one and a half years,the hike in lending rates have been at frequent intervals. This has left borrowers with little time to adjust their finances to meet the increasing EMI burden. The interest rate hike is resulting in the home loan eligibility of the borrowers coming down significantly while the property prices have risen during the same period. With the expectation of the interest rates to go further up,the home loan borrowers 8211; both current and prospective are quite worried,says Vipul Patel,Director,Home Loan Advisors 8211; a Mumbai-based home loan advisory firm.

Is timing a correct strategy?

Affordability takes a hit when the interest rates go up,which may give rise to doubts in the minds of the buyers on the timing of the property purchase. Buying property is a high value purchase and is one of the most important financial goals in ones life. It usually takes several months of hunting and research before one decides and finalises a property. Timing the purchase based on interest rates has its own set of inherent risks and is not a prudent strategy to adopt. If you are looking at buying a property for your end-use,it is better not to time the purchase based on the prevailing interest rates. However,look at buying ready to move-in property even if it is priced a little higher than the under-construction one as you would not want to get stuck in a situation where you are paying a high EMI on delayed project,suggests Harsh Roongta,CEO,Apnapaisa.

Should a buyer go ahead?

If a buyer decides to wait for interest rates to come down,the same property at the same price may not be available at a later stage. It is not uncommon to see the residential prices moving up by 10 per cent in an years time. Interest rates typically move in a cycle and take time to go up or come down significantly. Once you have identified a property for personal consumption,go ahead and buy it . If you have opted for floating rate of interest,the problem will be solved when the interest rates come down. It is a 20 year product and within 2 years of time the EMIs should correct once the interest rates start cooling off,suggests Suresh Sadagopan,CEO,Ladder 7 Financial Advisories.

In case a person is not able to buy a property because of the eligibility issues,due to interest rate hikes,s/he should be prepared to wait for at least 12 to 18 months which is the minimum time expected for cooling-off of the interest rates. Near future may only see increase in rates,says Satkam Divya,Business Head,Rupeetalk. However,the same logic may not apply to those looking at investing in real estate by taking home loan. If you are an investor then its better to wait for some more time for the interest rates to taper off,says Suresh Sadagopan.

Before taking the final call on the choice of a lender,do not forget to compare the terms and conditions of the home loan contract of various banks and NBFCs. There are several hidden clauses such as legal charges,pre-payment penalty,charges on balance transfer of loan etc which may hit you several years down the line when you want to prepay your home loan or make balance transfer to some other lender. Therefore,make sure to compare and discuss with the respective lenders,all such clauses which may create problems at a later stage.

Once a home loan is taken,the lender normally would increase the tenure whenever the interest rates are hiked. This makes business sense for the lenders as they earn interest for longer period. However,pre-paying some part of the loan would bring down the impact of the rate hike. It may be a smart strategy to build a cushion of liquid investments over time so that it can be used to pay off a part of the home loan to decrease the EMI burden,should interest rates go up in the next cycle.

ritukantojhaexpressindia.com

Key Takeaways

Be clear whether you are going to be an end user or only an investor

Higher the interest rate,lower is the eligibility on a home loan

Opt for a floating rate of interest

Ignore prevailing interest rates and go ahead after identifying property

Build a cushion to meet exigencies