To help readers keep pace with what’s happening in the real estate sector, Mint’s Q&A appears every other Monday.
Lately, I have been seeing advertisements of several builders announcing projects with smaller-sized flats for lower rates in and around Mumbai. I want to move from my rented flat to my own house. My friend was suggesting I should wait for another few months, as I would get a better deal and the interest rates would be lower too. Please advise if this is a good time to buy.
As you rightly said, developers are launching a number of affordable, low-cost housing projects and innovative schemes to bring back confidence and encourage buying. The cost of buying a house has come down due to a combination of factors, such as drop in property prices, lower specifications and reduction in the average size of units. Thus, for any new property being built or any new construction, the cost of acquiring the property is down by 30-40%. Home loan rates have also come down substantially from their peak and are at 2006 levels. While there is a possibility of a further drop in interest rates by 50-100 basis points (one basis point is one-hundredth of a percentage point) because of huge liquidity and low inflation, there is very little possibility of the rates shooting up in the near future. We feel developers have already lowered prices and may not be able to bring them down too much from these levels. Hence, for a first-time homebuyer like you, this is a very good time to buy a house.
I have a fixed deposit (FD) of Rs3.5 lakh, due for maturity in October 2011, on which I earn 10.5% per annum. I had invested in it keeping in mind that I would have to make arrangements for my own contribution to buy a house. I have decided to buy a house in Ajmer, costing around Rs15 lakh. On checking with one of the banks, I was told I would get a loan of 80% of the property value. As I have arranged for my own contribution of 20%, I will still be left with the FD amount. Is it advisable to continue the FD, or should I use it to increase my own contribution?
It is great to see people plan so methodically by putting aside some money and saving over a period of time for their own contribution. You may want to consider the option of taking advantage of the 80% home loan and keep the deposit amount intact, as your deposit will not only fetch you a higher interest income but will also prove as a contingency fund you could use easily in emergencies.
Moreover, in case you decide to go for a premature withdrawal of your deposit, you will not only have to bear the charges but will miss an opportunity to earn a high rate of 10.5% on your deposit, as deposit rates are around 8-8.5%. So, it is not advisable to prematurely encash your FD to increase your own contribution. On the other hand, housing loans have great tax benefits. Especially in the current scenario, with floating home loan interest rates coming down, the effective interest rate for a customer looking at a housing loan of about Rs15 lakh at 9.25% per annum is just around 4% post-tax, assuming that all available benefits are availed of.
Renu Sud Karnad is joint managing director, HDFC. Readers may write in with their queries and comments to firstname.lastname@example.org