The 50% hike in home loan rates in the last 18 months has not only dented realty sales, but also upset monthly budgets of existing home loan customers
Property rates are, of course, the most important consideration while buying a home, but home loan rates, too, play a significant role in the years that follow the purchase.
With 90 per cent of home loan customers opting for floating rates, their monthly budgets fluctuate in tandem with the quarter-by-quarter movement of the home loan rates. Interest rates have shot up by 50 per cent in the past 18 months — from just 8 per cent per annum in 2009-end to the current 12 per cent. This has not only affected the monthly budgets and savings plan of existing home loan customers, but also proved to be a deterring factor for aspiring home buyers.
Here are three real-life stories representative of the impact of the rising interest rates:
The Hopeful
Nerul-resident Prateek Deshpande, a sales professional who got married last year, is keen on buying a 1BHK apartment in Navi Mumbai. “Property prices are and interest rates are high; this is a bad time to take a decision,” says the 27-year-old, adding that unless one of the rates dips in the near future, he has to continue staying in the joint family and save up till he can afford to move out.
Prateek has a difficult choice to make — sign up for the high rates now or wait it out only to meet much higher rates in the years to come.
The hike in interest rates have also triggered a cascade effect, not only leading to an increase in the cost of the home loan, but also of construction, which is passed on to buyers. “These hikes have not made any impressive dent in inflation. Whatever difference we can see can be attributed to a high base effect and the tight monetary policy being followed, rather than to the hike in lending rates,” says Sanjay Dutt, CEO-Business, Jones Lang LaSalle India.
The Savvy Customer
Jyotirmoy Dwivedi, a 34-year-old operations manager at TCS, took a housing loan for Rs30 lakh early in 2010 to finance the acquisition of his Rs64 lakh 2BHK apartment at Mahavir Nagar, Kandivili. Signing up at a rate of just 8.5 per cent per annum — with a 2-year lock-in period to boot — the EMI of Rs26,000 was still something that Dwivedi was not comfortable with.
Just a few months into his new loan, Dwivedi pooled his resources to make a prepayment of Rs20 lakh and knock down the home loan to manageable proportions — with his EMI crashing to just Rs13,200, that too for a 10-year term. “It was a choice between investment or repayment of loan and after considering factors like rate of return and tax liabilities, it made sense to repay the loan,” says Dwivedi, who on hindsight got the timing perfect — for buying the property when the rates were lower and knocking of the loan before the high rates kicked in.
Dwivedi now deploys the home loan as a tax-saving tool, and plans to prepay the optimum principal component to maximise the tax savings every year. “I would definitely advise people with fat loans to look at part payments as soon as possible. It is a trade-off between how much you can afford to pay every month, vis-à-vis the benefit you are getting from that loan,” he says.
The Victim
Vashi-resident Anil Jacob had to gather funds from every avenue to put together his contribution for the Rs40 lakh-worth 2BHK flat in 2008, and still push the housing finance company to give the maximum amount that he was eligible for. The loan came with an EMI of Rs26,000, which the 42-year old planned to repay before he retired from his factory.
When the tide turned in mid-2010, Jacob got the first shock when the tenure of his loan increased from 15 years to 18 years over six months. “The housing finance company informed me that my EMI has been increased to Rs29,000 since my repayment period cannot be extended beyond my date of retirement,” says Jacob, who faced the prospect of paying a good Rs62 lakh by the time his loan was totally repaid by retirement.
With his monthly income stretched between the education of his two children and medical care for his parents, Jacob now faces the prospect of breaking his nest egg to keep the house running. “The market price of the flat has gone up to Rs75 lakh, but it means nothing till I don’t sell the flat,” says Jacob.
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