Let’s start with the basics. Repo rate is the rate at which banks borrow money from the Reserve Bank of India. So, higher the repo rate, higher is the cost of money and vice-versa for banks and housing finance companies.
The repo rate is also used by monetary authorities to control inflation. “If the repo rate is low, banks have to pay a lower interest amount on their borrowings. This will enable them to charge lower interest rates on the loans taken by the housing finance companies. The housing finance companies can then pass on this benefit to the customers by reducing their lending rates on home loans,” says Harshil Mehta, CEO, DHFL.
For instance, Harshil explains, if the repo rate is five per cent and a bank takes a loan of Rs 100 from the RBI, it will pay an interest of five rupees to RBI. If RBI decides to reduce repo rate to three per cent, banks will pay three rupees as interest on the loan and save two rupees. However, the benefit of reduction in repo rate will be felt by a borrower only after the lending bank reduces its base lending rate.
Reaping the benefits
Nearly 25-30 per cent of loans given by banks are for home loans. The low cost of borrowing helps banks in reducing the interest rates and thereby generate
additional demand. When RBI cut the repo rate by 50 bps to 6.75 per cent, most of the prominent banks also cut their home loan interest rate.
“So, what it means for an individual borrower is that if you have borrowed Rs 50 lakh from SBI for 25 years, your pre rate cut EMI would be Rs 44,382, which would now reduce to Rs 42,992 for the same period at 9.30 per cent interest rate. Hence, you shall save around Rs 1,400 per month in your EMIs,” explains Anil Rego, CEO & founder, Right Horizons.
Alternatively, the borrower can also reduce the number of EMIs by keeping the same EMI value. In the above case, one can reduce the number of EMIs to 22 years keeping the same EMI of Rs 42,774.
The rate cut announced by RBI, however, does not automatically reduce the rates on home loans. The impact of rate cuts affects different banks differently, as they may or may not choose to reduce their base rate. “In case, they lower their base rate, the home loans on floating rate of interest will get favourably impacted and accordingly their EMIs will get reduced. The rate cut would have no impact on home loans at fixed rate as the rate of interest offered on such loans is static and is not vulnerable to interest rate cycle, higher or lower,” says Kalpesh Ojha, chief financial officer, AHFCL.
According to Sadhav Mishra, partner – real estate, SNG & Partners, it is important that before you avail a home loan you carefully analyse the property you investing in, your cash flows vis-à-vis the EMI, the reputation of builder, the required approvals for the project and the like. “You need to ensure that the unit agreed to be sold to you is not subject matter of any prior bank loan, which the builder has taken. If there is any such loan, ensure that the concerned bank gives the NOC in respect of your unit.
Understand from the builder the stages of construction and ensure that your
payments in under construction projects are made only against completion of each stage of construction,” he advises.
Normally during a falling interest rate period, more people go in for home loans. “We usually go for home loans for longer durations of 10 to 20 years and therefore, will have to go through interest cycle of ups and downs. The advantage of taking home loans when interest rates are low and falling is that more people get eligibility for the loans since the EMIs are reduced,” says Mimi Partha Sarathy, MD, Sinhasi Consultants Pvt Ltd.
Zaheer Majeed Memon, partner, Zara Habitats LLP, agrees. “Looking at the
current interest rate levels and positive steps undertaken by our monetary policy regulators, it indeed is the right time to avail a home loan. With fourth consecutive cuts in repo rates this year — almost bringing it down by a 125 basis points in 2015 itself — this could very well be a desirable time for a borrower to avail loans at attractive rates,” he says.
In a notification issued recently, RBI’s decision to allow loan-to-value ratio (LTV) of up to 90 per cent for home loans of Rs 30 lakh, which was earlier only allowed for loans up to Rs 20 lakh, also makes it an apt time to go for home loans, especially for the low and middle income customer segment. LTV denotes how much of the property value a bank can lend to a borrower. A 90 per cent LTV indicates that the buyer will have to shell out only 10 per cent of the property value and the rest can be financed through banks.
“Currently, home loans offer a great option for earning individuals to make an investment as well as save on taxes. People can now afford to buy much larger houses. Even after the complete repayment, which may take up to 20 years, there is still a huge amount that is saved,” concludes Adhil Shetty, CEO, Bankbazaar.com.
The checklist
Some things to consider before you opt for that attractive home loan:
In such times, when the interest rates are expected to come down further, one must go in for a floating rate scheme.
Ensure that the property, which you are buying, is legally approved and verified by various authorities.
Consider the fees and other charges applicable — documentation, pre-payment of loan, late payment of EMI and the like.
As a general rule, the loan amount you are eligible for is five times your annual CTC.
Lookout for transparency in the home loan process and also consider the expected turnaround time.
Enquire about add-on services like free insurance cover.
Check your CIBIL report, as all banks look for good CIBIL scores before giving loans.
