The mortgage interest rate is an important factor in your home buying decision. Often, interest is the biggest cost of buying a home. For example, on a loan of Rs 50 lakh for 20 years at 7%, the total interest amounts to Rs 43.03 lakh. We took advantage of two years of rock-bottom mortgage rates. But now the interest rate cycle is turning. In a short period of five weeks, the floor fell from 6.40 to 6.80% by 90 basis points to 7.30 to 7.70%.
The rate hikes were triggered by rising inflation. Floating interest rates on home loans are pegged to the RBI mandated repo rate. With inflation tightening, the repo quickly rose to 4.9%. It is expected to continue to rise towards 6% unless inflation is brought under control. The question for people looking to buy a home is, in this scenario, does it make sense to buy a home as borrowing costs rise? Before deciding, buyers should keep the following things in mind.
Buying a home is a capital intensive process. Financial preparation is essential. If a house costs Rs 100, you also need to consider additional costs such as GST, stamp duty, registration, legal checks, furnishing, brokerage, financing, packing and moving . All of this can easily bump the price up to Rs 120. But in most cases, you’ll probably get a loan of 80% of the base price plus GST. It would be around Rs 85. The rest has to come out of your pocket. So you are looking to pay at least Rs 35 from your savings. If you are ready with this money, only then can you get the loan.
Occupy or invest?
You can buy for your own account or simply invest in the property. The former makes more sense when you’ve decided to build your life in one place. If not, you might want to reconsider. Second, as an investment, you should compare real estate to any other investment option such as mutual funds, stock markets, or provident funds. Real estate as an investment destination has struggled in recent years, and according to RBI data, annual returns are lower than a savings account. Add to that maintenance costs, property taxes and loan interest. In most cases, real estate returns are negative. Therefore, the risks are too high and the rewards too low.
Income stability required to repay the loan
In a scenario of high inflation, your financial stability is threatened in various ways. Your living expenses increase. Your returns on investment are volatile. There may even be uncertainty about income and employment. It is very important to have a stable income and repayment capacity when you take out a big loan. Plus, buying a home shouldn’t jeopardize your emergency fund that you need for contingencies like job loss or a medical emergency. You may even need this fund to provide EMI payments after job loss. Ideally, your IMEs should not exceed 30-40% of your monthly income.
In the current scenario, you also need to budget for your home loan rate to increase significantly from around 7% now to around 9% by 2023. But if you have the income stability to get through this phase of volatility, you shouldn’t let the macroeconomic scenario frustrate your home buying plans.
Tips for repaying the loan early
Rising inflation may take time to subside, but the RBI will continue to intervene by raising interest rates. If you take out a new loan now, your term will likely increase with rising rates. You need to have a plan to deal with the growing burden of NDEs. If you are comfortable, increase your existing EMIs to reduce the term of the loan. You could prepay 5% of your loan balance each year. Or you can make strategic lump-sum payments that reduce the burden of extra months added to your loan by rate increases.
In summary, although the economic scenario is unfavorable and interest rates are rising, what really matters is your personal financial preparation. If you have the funds, credit rating, and income stability, go for your purchase. Otherwise, delay your decision until you are ready.
(The author is CEO, Bankbazaar.com)