This marks the debut of a column on the real-estate sector, to help readers keep pace with what’s happening in this business. Mint’s Q&A on real estate will appear every other Monday.
Do you think the rise in home-loan rates is close to peaking? If I want to buy a residential property in the National Capital Region (not for investment), is it the right time? Or should I wait?
In the foreseeable future (three-six months) rates are likely to remain stable, as inflation is expected to come under check as the Reserve Bank of India has been taking necessary steps to tame it.
Having said this, customers have to realize that housing loans are long-term commitments and during this tenure, there will be some periods when interest rates move up and some periods when they will move down. Besides, it is also difficult to predict interest rates. Two years ago, interest rates were prevailing at an all-time low of 7-8%. Today, the rates have hardened and currently are around 11-11.5%. In future, they may move down. Also, customers who have taken the loan at a higher fixed rate today have the option to convert their fixed-rate loan to a lower floating-rate loan (at a small fee) when the interest rates start to fall. Hence interest rates per se, will not deter the actual user. Moreover, the effective cost of a loan is much lower considering tax breaks on housing loans. A home loan qualifies for tax benefits of Rs1 lakh on the principal amount repaid and up to Rs1.5 lakh per annum on the interest paid.
If I do go in for a purchase right now, should I opt for a fixed or floating loan?
This would depend on your risk appetite. If you are totally risk-averse, it may make sense to opt for a fixed-rate loan as the rate of interest here is not subject to any change at all and remains fixed throughout the tenure of the loan irrespective of any fluctuations in the interest rates in the economy or the home-loan company’s internal policies.
On the other hand, if you are willing to take a risk, then a floating rate may be a viable option. For a floating-rate loan, most institutions reset the tenure of the loan if there are any interest rate fluctuations rather than change the equated monthly instalments (EMI) to avoid any immediate impact on the customer. However, in such a scenario you should be cautious that the increase in the loan tenure does not go beyond your earning years or into your retirement period. Today, in spite of the high interest rates, a majority of housing-finance customers are opting for floating-rate loans. The reason is the difference between the floating-rate interest and the fixed-rate interest, which is currently about two percentage points. While the floating-rate loans at HDFC are at 11.25%, the pure fixed-rate loans are around 13.25%.
If you are not sure on what to opt for, it makes sense to opt for something that provides you with a choice of breaking up the loan into fixed and floating components and hence balance the risk relative to your risk-taking capacity. HDFC has evolved a unique two-in-one home loan product, where the loan can be broken up into two parts— one part on which interest is charged at a fixed rate and the other part on which interest is charged at a floating rate.
In this loan, you benefit both ways. The fixed-rate portion of the loan helps you hedge your interest rate risk against rising interest rates as the rate of interest is not subject to change at all. And when interest rates fall, the floating rate reduces with it and you benefit. Besides, the floating rate is generally priced lower than the fixed rate, so from day one you pay a lower interest rate on the floating part of the loan.
Is there any study, which gives a ranking to banks on how often they have invoked the reset clause in fixed-rate loans?
I do not recall any such study that offers data on the number of times a home-loan player has invoked the reset clause in fixed-rate loans. Still, a customer should be wary while availing of such a loan. Today, most players offer fixed-rate loans with a right to increase the rate in case of adverse money market conditions or even changes in their internal policies. HDFC, however, offers a pure fixed rate product without any reset conditions where the rate remains fixed for the entire tenure of the loan and is not subject to any change.
Are there any guidelines from the Confederation of Real Estate Developer’s Associations of India (Credai), on how a super area is to be defined?
Different builder associations have different codes of conduct for its members, which also defines the basis for selling the flats. However, there is no standardization among them. Going forward, though, the developers will have to accept the norm of selling on the basis of carpet area, which is a tangible method and this will help industry become more transparent.
Renu Sud Karnad is executive director with HDFC.
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