Home loan rates are low. In fact, very low when compared with the historical trends. Many home loans are quoting at sub-7% now! I can’t remember when last time the rates were so low in recent past.
But that’s not all.
Property prices have cooled off a bit too, at least in some cities and localities. Prices of homes/flats are lower compared to what they were at the start of the year and are comparatively reasonable. And the developers are also willing to negotiate further by offering better deals to clear their unsold inventory and get their cashflows going again. True that many good projects may still not offer direct discounts. But you may still get sweetened offers/deal in terms of waiver of certain charges, complimentary parking, or more borrower-friendly staggered payment schedules.
So a combination of low home loan rates and reasonable property prices definitely makes for a case for the current times being quite good for prospective home buyers.
And there is absolutely no doubt that home-ownership brings stability and peace-of-mind for the family. There have been a lot of discussions around buy vs rent with strong opinions on both sides. But in general, buying a house for personal use is better than renting. At least eventually if not immediately. And it has to be looked at from a peace-of-mind perspective and not just a financial one.
Buying real estate as an investment in India is a bit debatable and another matter altogether. Do read a couple of detailed analysis here and here to know more about property as an investment.
But buying a house (at least one) has always been considered as a sort of necessity in India. And even the rise in prices to unaffordable levels in the last couple of decades hadn’t stopped people from going that route.
Nevertheless, for now, the combination of two factors – i) one of the lowest ever home loan rates, and ii) increasing affordability of property due to price correction has no doubt made it very attractive for homebuyers to think about taking a loan to purchase their dream houses.
But is this a good idea?
There is no one answer to this. But let’s try and discuss this a bit.
Let’s first talk about the loan rates.
Currently, rates are close to 7%. But just a few quarters back, the rates were around 8.5%. How does this impact the interest outgo? Suppose you planned to take a home loan of Rs 50 lac. Now depending on your loan tenure, the EMI would differ as follows:
- 25-year tenure: EMI of Rs 40,261 for loan at 8.5% Vs EMI of Rs 35,339 for loan at 7%. That’s a saving of about Rs 4-5000 per month. And total interest savings would be Rs 14-15 lac.
- 20-year tenure: EMI of Rs 43,391 for loan at 8.5% Vs EMI of Rs 38,765 for loan at 7%. That’s a saving of about Rs 4-5000 per month. And total interest savings would be Rs 11-12 lac.
- 15-year tenure: EMI of Rs 49,237 for loan at 8.5% Vs EMI of Rs 44,941 for loan at 7%. That’s a saving of about Rs 4-5000 per month. And total interest savings would be Rs 7-8 lac.
So this home loan rate reduction is definitely a good thing for the borrowers. A lot of savings to be made. And for the same EMI that they were getting a year or two back, they can now get a bigger home loan. And since property prices have come down a bit, it’s a double benefit as you can buy a bigger house for the same EMI outflow.
Note 1 – Low home loan rates are not available for everyone. It’s offered to those who have good credit scores. So if you are planning to take a home loan, better take a lot at your credit scores first so that you have some information with you to negotiate better.
Note 2 – For a more detailed take on this, read how you can save several lacs with shorter home loan tenure.
But you need not be enticed by these 2 external factors only.
You need to look at it from your home affordability perspective as well.
How?
Let me show you how the maths of purchasing property using home loan works. Don’t worry. I will make it simple enough for you to understand.
The first point is EMI Affordability from the lender’s side. There is a sort of unwritten rule that lenders adhere to. The banks and lenders will only lend you to the extent that the total of all loan EMIs doesn’t exceed 40-45% of your salary. Do note I am saying all the loans and not just your home loan EMI. So if you have multiple loans like home loan, personal loan, car loan, etc., then the sum total of all EMIs will be considered for the above-mentioned 40% rule assessment.
Let’s say your monthly income is Rs 1 lac. So using the above rule, the lenders will only lend till your EMIs don’t exceed Rs 40-45,000.
Now you use this piece of information, i.e. your EMI cannot exceed Rs 40-45,000 even if you want to (because lenders won’t let that happen). So what amount of loan can you get for a monthly EMI of Rs 40,000?
Depending on different loan tenures (@7.5% rate), here are the home loan amounts you can avail:
- 30-year loan: Rs 57-58 lac
- 25-year loan: Rs 54-55 lac
- 20-year loan: Rs 49-50 lac
- 15-year loan: Rs 43-44 lac
So now you know how much loan will you get.
But there is one more constraint here. And that is from your angle and not the lenders. The lender is willing to give a loan with an EMI of Rs 40,000 on a Rs 1 lac per month salary. But what if your personal expenses are Rs 75,000 per month? Then obviously you can’t manage both as you don’t have enough surplus to service the EMI of Rs 40,000 per month, Right? Just keep this in mind as well.
Let’s now come to the other factor. Your downpayment ability.
As you know, you also need to put in 15-20% of the cost of the house as downpayment. That is, you will only get a loan of about 80-85% of the cost of the property.
Using our earlier example where you earn Rs 1 lac per month and plan to take a 25-year loan of Rs 50 lac so that the EMI is around Rs 40,000 per month.
Since lenders will only lend for about 80-85% of the cost, you need to put in Rs 12.5 lac as 20% downpayment while the bank will give a loan of Rs 50 lac for Rs 62.5 lac property.
So if you are unable to bring in Rs 12.5 lac in downpayment, then the lender won’t lend Rs 50 lac even if it meets the criteria of 40% limit on the monthly EMI. Some people take personal loans for downpayment. That’s a risky strategy and should be resorted to as only the last option.
This is how EMI affordability and Downpayment capacity also come into the picture when you want to purchase a house of your choice. Just because loan rates are low and property prices are down doesn’t mean you should go for it. You need to assess your home affordability from these two lenses as well.
And some people just go overboard with the idea of using tax benefit on home loans. Don’t do that. It’s not as big a benefit as you might think it is.
Another aspect to consider is your job stability. And / or whether you are the sole earning member of the family or your spouse is working too. Imagine a situation that you take a home loan to purchase a house but after a while, you lose your job. Scary isn’t it? You will then not be able to service your EMIs if you don’t have a backup plan (having some buffer savings in an emergency fund) or don’t get a job quickly again.
Further reading – How to manage home loans wisely?
Talking of having a buffer for emergencies, I strongly advise that when taking a big loan (generally home loans), ensure that you have secured yourself for various risks. Do not try to use all your savings to increase the downpayment and reduce the loan amount. Always keep some money with you as emergency savings. Emergencies don’t wait for your emergency fund. So don’t test your luck please! A job loss, salary cut, uninsured medical emergencies of family members, unexpected and unplanned repair expenses, emergency travel plans. Anything can derail your cashflows. So have a buffer in place and is very important to hold on to some liquidity at all times. It might come at a cost of higher interest outgo as you will be taking a loan of a higher amount. But so be it. At least you will have a peaceful night’s sleep.
So all said and done, don’t take a home loan just because the loan rates are low and property prices have declined. For most aspiring home-buyers, it no doubt looks like an ideal time to buy a piece of property or your first house or to upgrade to a bigger house. And if we put ourselves in the shoes of the prospective first-time home buyers, then it is definitely an opportune time for those who have been waiting to buy for a long time.
I think the decision to buy a home needs careful consideration and deep thought. Not just property prices and loan rates, you also need to look at it from a financial capabilities perspective. Assess where you stand financially. This means figuring out how much downpayment you can manage and how much home loan you can get (and EMI you are eligible to service).
When buying your house, stretching your budget to some extent is fine. But don’t go overboard. And if you are facing some financial stress, then don’t get carried away. Better to defer the decision to buy a home till things stabilize for you.
With falling interest rates, you might be in a hurry to avail the low home loan rates. But just don’t end up taking a big liability which you are not ready to properly handle.