Now Is the Right Time For Home Loan Borrowers-Ignore Interest Rate Directions
Borrowers, especially home loan borrowers, were glad to hear the reduction in repo rate from 6.5% to 6.25% announced by the Reserve Bank of India on February 6, 2019. The reduction in the benchmark rate came as part of the review of monetary policy. The key task assigned to RBI is balancing inflation and growth. As part of inflation target adopted by India, RBI is required to maintain inflation at 4% till March 31, 2021. The permissible upper and lower bands are 6% and 2% respectively. The latest inflation number released on February 12, relating to the month of January showed further decline raising expectation of further interest reduction soon, ahead of the general elections.
One of the key parameters that enthuses home loan seekers is low interest rate. Against the above mentioned developments, let us examine whether the home loan seekers should encash the opportunity and whether it is right time to avail housing loan to own the dream house.
Interest rate and home loan borrowers- Facts to be considered
1.Home loan is a long term affair. Normal period extend beyond 20 years. During a long period, every nation undergoes different cycles of inflation with corresponding corrective measures initiated by the central bank. Hence, the present decline in interest rate is a phenomenon that may or may not continue in the same direction. When the borrower undergoes through various cycles of ups and down of interest rate, the cost of housing loan tends to even out, notwithstanding the high or low interest rate at the time of availing housing loan.
2.Even then, during initial stages of housing loan, the balance outstanding will be on higher side. The interest charged in home loans during this period will be on higher side as account balance is high. Home loans are offered with monthly compounding effectl. Hence, if the interest rate at the time of initial stages is on lower side, the overall financial burden tends to be lower compared to higher interest rates at the same period.
3.When interest rate goes down, property value goes up and vice versa. Hence, the advantage in interest rate gets neutralized by the increase in property value. During the last few years, interest rates and property value always exhibited diverging trends, moving in opposite directions.
4.The option available for a borrower is to opt for a fixed rate housing loan to take advantage of lower rate. But, interest rate in fixed rate loans are also not fixed for the entire period of the loan. The interest rate gets revised periodically. For some banks, it is two years where as for some other banks it can be three or four years. At the time of interest reset, the rate gets mapped to prevailing market rate for the next block. Further, the fixed rate offered by banks tend to be slightly higher compared to then prevailing floating rate.
In the case of floating interest rate, the rate normally gets revised considering various aspects like repo rate, market conditions, inflation rate, government policies etc. If after availing a fixed rate loan, if the interest rate goes up, the fixed rate borrower gets benefitted. But if, the interest rate goes down, the trend becomes advantageous for floating rate bearing home loans. Interest rate in a floating rate housing loan too gets adjusted to market rate periodically, at lower time gap compared to floating rate. Normally interest reset is aligned to the anniversary date of availment of the loan.
5.Banks are not passing on the interest reduction benefit to the market immediately on announcement of reduction in benchmark rates. To address this issue, RBI has proposed linking the rates of loans to external benchmarks. If the same gets implemented as expected by April 1, 2019, then waiting for decline in interest rate need not lead an advantageous position.
6.Banks have been given freedom to fix interest rates subject to certain stipulations. The reduction by banks depends on lot of factors, main among them being the cost of their deposits and ability to mobilize additional fund from market at lower rate. So, reduction in interest rate in home loan accounts commensurate with the reduction announced by RBI cannot be expected every time. In other words, rate reduction in housing loan to a great extent depends on the efficiency, policies and profitability of your bank too. But, the reverse has been true on many occasions. Banks have always increased interest rate immediately on announcement of increase in benchmark rate by the RBI.
7.For many banks, housing loan and car loan customers are important as both represent reasonably long period of relation which can be leveraged further. Normally, banks offer the most attractive interest rate for these segment of borrowers notwithstanding the market interest rates and trends.
8.Borrowing decisions are not normally linked to interest rates. It coincides with the decision to acquire an asset. If a suitable property is identified, nobody waits for reduction in interest rate as purchase has to be concluded in the shortest possible period. So availing the loan is secondary to acquiring the property.
Right time for availing home loans- Conclusions
From the forgoing, the following can be concluded reasonably:
1. Cost of borrowing evens out over the long tenure of the loan.
2. If the interest rate at the initial stages of home loan is less, the overall financial burden will be slightly less.
3. Reduction in benchmark rate by regulator not always gets passed to housing loan customers.
4. Saving in interest costs gets neutralized by increase in asset price and vice versa
5. Borrowing decision is secondary to acquiring asset/ property.
In the case of investment decision, investors seldom succeed in timing the market. Investment advisers always says, ‘Now is the right time for the investment’. The same is applicable in the case of home loan borrowers too. So for any home loan seeker, now is the most appropriate time to avail housing loan. Don’t wait for further interest rate reductions, if you have already identified an asset.
