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Home >Money >Personal Finance >Should you take advantage of low home loan rates?

This week, Housing Development Finance Corp. joined State Bank of India, Kotak Mahindra Bank, and Bank of Baroda in cutting home loan rates. These rate cuts are being offered to both salaried and non-salaried borrowers. Mint takes a look:

Should  you  buy a  home because rates are low?

Home loan interest rates are just one of the several factors to be taken into consideration while buying a house. Financial advisors generally advise buying a house if you are buying it to live in and not as an investment. This is because a home purchase for most individuals is a large, illiquid, and undiversified investment. In other words, you cannot sell a house quickly if you need the money, and you cannot easily sell just a part of it if you need a small amount of money. This is different from investing in equities and mutual funds, which can be sold more quickly and in parts.

Should you buy house if you are renting one?

In today’s economy, people often change jobs and change the cities of their residence. Buying a home in one city makes this process more difficult and reduces your ability to move. The covid-19 pandemic has also brought with it the trend of people in different fields working from home. This has reduced the need to buy expensive homes in big cities. On the flip side, buying a home helps save on rent and this can be a financial net positive in the long run. Compare the costs of buying a house with the annual rental cost, before making a decision.

A tough call
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A tough call

What are the costs that home buying entails?

Buying a house involves making a down payment from your own savings. Then there is the equated monthly instalments (EMIs) to be paid on a home loan, if one is taken. Other costs include stamp duty, brokerage and registration fee, as well as the cost of regular maintenance, parking slot charges, property tax, and the cost of repairs.

What about the tax savings?

You get a deduction up to 1.5 lakh under Section 80 C for principal repayment of a home loan and a deduction up to 2 lakh on interest payments under Section 24B. If you account for these deductions, the  effective  rate  of interest on  your home loan falls. However, Section 80 C can also be used for other kinds of investments such as equity linked savings schemes (ELSS), or public provident  fund  (PPF).  Money used on home loan interest could also be used to get tax deductions elsewhere such as National Pension System contributions.

Can you lock in the low rates?

The short answer is no. In most home loans, the interest rate is variable in nature. It moves up and down in sync with overall rates in the economy. Most banks have linked their home loan rates to an external benchmark, usually the repo rate of the Reserve Bank of India. The home loan rate of banks is set at a certain premium to the repo rate based on the creditworthiness of the borrower and moves in tandem with the repo rate. If the repo rate goes up, your EMI will also go up.

 

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