Home loan rates in India have been low for some time now. Compared to a time just a few years ago when rates were 8-9%, right now these are even below 7%.
Just yesterday I was reading that country’s largest bank SBI too has brought down home loan interest rates to a record low of 6.7 percent! (6.7%). As an added attraction, the bank is even waving off the processing fee till the end of this financial year in March. Another large private player Kotak Mahindra Bank has also cut down its home loan rates even further for a limited period to 6.65%.
I am not sure which bank is offering the lowest home loan rate currently in India but I am sure these are pretty close to what the lowest rates in the industry might be.
But this trend of home loan rates falling continues for some more time, then I guess that the government’s flagship program and goal of ‘Housing for all’ in India will be achieved pretty soon.
So what is happening? Why are the rates now at possibly the cheapest Home Loan rates in the last 2 decades?
I am sure that media and banks themselves will be telling everyone that this is indeed the best time to buy a home as loan rates are at historical lows.
But should you?
The first thing to note here is that these delectably low home loan rates of 6.6-6.7% aren’t available to everyone. At times, you may be lured by the eye-popping low rates in loan advertisements, but sadly, its not that simple.
The actual home loan rate that any borrower will get depends on several factors. Some of them being – having a good Credit CIBIL score. The higher the score, the lower the rates can potentially be. You can easily expect that an individual with a credit score of 750 will be paying a higher interest rate than one having a score in the range of 800-900. Banks generally are comfortable extending better rates to borrowers who maintain good repayment history. The Loan-To-Value (LTV) ratio is another important factor. Lenders want to reduce their risk. And you can help them do that by making a larger downpayment and hence reducing the loan amount and LTV ratio. So if you want to have a lower home loan rate, then consider making a bigger down payment. Then is the factor of Borrower’s Income and it’s stability. Banks will offer lower home loan rates to salaried individuals, especially those employed in the public sector or reputed private organizations. The location of the property also has a role to play to an extent. Then there are factors like age, gender (ladies get a better loan deal mostly), etc.
So if you are looking to take a home loan, it would be a good idea to check your eligibility across multiple lenders before making a decision. But do note that this can lead to multiple ‘hard’ loan queries being made and this would alert the credit agencies that track your credit scores. And you know that multiple hard credit queries can impact credit scores negatively. So be careful about that and try to do your groundwork online itself or via loan aggregator portals that are many in number these days.
Now coming back to the question at hand.
The home loan rates are one of the lowest ever. And property prices too are stagnant or falling a bit in many locations.
It’s possible that the dream house that you always wanted to buy may now just be well within your reach! So is it a good idea to take a home loan now?
There is no one answer to this. Also, don’t be in a hurry. You don’t want to take a liability that you may not be properly prepared to handle. So let’s think this through calmly first.
Let’s first talk about the loan rates.
Currently, rates are close to 6.7%. 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 lakh.
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 34,388 for loan at 6.7%. That’s a saving of about Rs 6000 per month. And total interest savings would be Rs 17-18 lakh.
- 20 year tenure: EMI of Rs 43,391 for loan at 8.5% Vs EMI of Rs 37,870 for loan at 6.7%. That’s a saving of about Rs 6000 per month. And total interest savings would be Rs 13-14 lakh.
- 15 year tenure: EMI of Rs 49,237 for loan at 8.5% Vs EMI of Rs 44,107 for loan at 6.7%. That’s a saving of about Rs 5000 per month. And total interest savings would be Rs 8-9 lakh.
You can self calculate the above figures using this freely available home loan EMI calculator. Or simply check the details here – Rs 25 lakh home loan EMI or Rs 30 lakh home loan EMI or Rs 40 lakh home loan EMI or Rs 50 lakh home loan EMI or Rs 1 crore home loan EMI or
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 now.
Related reading: Do read how you can save several lakhs with shorter home loan tenure.
What else?
Now you also need to look at it from a home affordability perspective.
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 lakh. 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 (@6.7% rate), here are the home loan amounts you can avail:
- 30-year loan: Rs 61-62 lakh
- 25-year loan: Rs 58-59 lakh
- 20-year loan: Rs 52-53 lakh
- 15-year loan: Rs 45-46 lakh
So now you know how much loan you can get given the constraints.
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 lakh 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 a 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 lakh per month and plan to take a 25-year loan of Rs 50 lakh 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 lakh as a 20% downpayment while the bank will give a loan of Rs 50 lakh for Rs 62.5 lac property.
So if you are unable to bring in Rs 12.5 lakh 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.
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. Don’t use all savings to reduce home loan. 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.
Once you are sure about your financial strength after some time, you can consider what is the best time to prepay home loans then.
Further reading – How to manage home loans wisely?
So all said and done, don’t take a home loan just because the loan rates are currently very 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.
* You never know if these loan rates might continue for some time now given the prevailing economic environment.
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).
So with falling home loan rates, you might feel like quickly avail the low home loan rates. But just don’t end up taking a big liability that you are not ready to properly handle. Think carefully before taking benefit of this opportunity.
Should we consider income tax also as factor bcz govt gives you tax exemption of 3.5 lac .