A story of interest

A story of interest

Owning a dream home costs more nowadays, thanks to increasing interest rates of home loans. Prashanth G N gets to the root of the happenings.

If interest rates on home loans become stable, consistent and predictable, consumers would like nothing better. Their decision to buy property would also be timely and consistent. But home loans have had the tendency to become costly because of high interest rates. The property consequently comes at a higher price.

Source of problem

Real estate players and analysts say home loans are tied to the Reserve Bank of India (RBI) dynamics. If RBI’s lending rates increase, banks will automatically hike the interest on loans. Nagaraja Reddy of Credai says, “The RBI has linked loans and interest rates to inflation.” The RBI argues otherwise.They are of the opinion that inflation is linked to vegetable prices, which is peculiar.

There is a larger problem at hand — vegetable prices go up because there are not many agriculturists these days. Few people want to get into farming. So stocks may not be high, but prices go up not only because of stock problems, but also because middlemen control prices at which they buy and sell to the consumer. It would be beneficial if the vegetable prices are monitored everyday, and the government comes out with a study on the demand pattern for veggies.

“The RBI should not link interest rates to inflation seen in the form of rising vegetable prices. The fluctuations in interest rates are a result of micro and macro factors, both of which can be controlled by specific policies,” says Reddy.

The fluctuating prices are not daily, but monthly or even tri-monthly. If there is too much fluctuation because of frequent changes in RBI guidelines, then the money over and above the normal and original interest rates is collected from the consumer by dividing it monthly for a period beyond the originally agreed period. For example, if the price of an apartment goes up by Rs 50,000 over and above the original price, then this is charged over a period of four to six months over and above than the original number of months, which may have been 40 months.

Economy in focus

The reading of analysts is that the economy is still not doing well, which is why the RBI has to keep watch on interest rates closely and introduce changes whenever necessary. If there is a change of 0.1 or 0.2 points, then the interest rates would not be too high. If property price increases from Rs 30,000 to Rs 30,500, then the change in interest rate would not bother the consumer.

But incase the points are increased by one, two or even five per cent, home loan interest rates become costly and the price of the property also goes up. The repayment will have to be made over an extended period.

Banks nowadays give loans ranging from 9.75 per cent to 15 per cent. The latter rate hurts if RBI changes are high. Typically consumers would like to get loans below 10 per cent, and if they can’t, a 11 per cent loan is welcome. But if it crosses that limit, purchase of apartments may come down.

Property developers would naturally not want a high interest rate regime. To offset the scare of lower demand, they offer incentives to purchasers in the form of discounts and facilities.

A family in which both husband and wife work, would be able to handle the high EMI’s charged for properties above a certain range and they will also be able to bear higher interest rates. A family with only one breadwinner would find it tough paying heavy EMI’s.

Ease of payment

Bangalore has scores of families where both husband and wife pay loans, but probably the number of families with single incomes are far higher and for whom discounts play a major role.

Typically, the new class which is able to afford high EMI’s are from the information technology sector (IT) which has been the most effective engine of growth and employment in Bangalore over the last 30 years that began with Texas Instruments and Infosys in the early 1980’s. Given that the IT sector grew in south, southeast and eastern suburbs, the density of apartments in these regions is high. And it is normal to see many families with double income living in apartments located close to their workplace. Budget housing too is coming into Bangalore, especially on the outskirts.

Home loans would become affordable if the loan repayment is regular and consistent. There are problems on this front for bank as they experience the phenomenon of bad loans. Loans have to be written off because the party which had taken the loan is unable to pay.

For more cash flow, the loans given out will have to come back. Banks have outsourced the job of recovery of loans. It is to be seen how in the long run, recovery impact interest rates.

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