Are You Investing Wisely?

Owning a house is a dream shared by millions in our country, starting from the middle class to the super rich. Of course, the magnitude and the size of owning a property might differ, but the emotion behind the thought remains the same. In today’s scenario, a majority of property buyers opt for a home loan to fund their first homes in India. So once the decision of owning a dream house is made, then the next step of the process of applying for a home loan begins. Ensuring that every aspect is taken care of and then subsequently comparing your decision with the trends prevailing in the real estate market is a hard task.  Many things have to be taken into account such as - the current rate of interest on home loans, impending hike/ fall in interest rates.

Inflation plays a pivotal role in driving the interest rates up or down. This further drives the home loan rates. A rising inflation rate tends to increase the rates on loans. The cost of funds for banks increases, which further leads to an increase in home loan base rates, along with other loan rates, and consequently a raise in EMIs.

Additionally, the rapid increase in interest rates impacts existing loans in one of two ways – either the loan installment (EMI) goes up or the tenure of the loan (in months) increases, keeping the EMI installment constant. For some borrowers, the increase in installment can prove to be too high which could cause them to tip over and default. This holds true for those borrowers who have low incomes, given the inflation in food and various other household products. Thus, the higher interest rates can in turn precipitate non-payment amongst those borrowers who were good up until now.

New buyers must take time before deciding on the home loan plan - fixed or floating loan rates. This is important, in case they choose a fixed rate it would be beneficial in case of rising interest rate expectation and the opposite holds true for floating rates. Also, individuals tend to wait for the interest rates to come down and postpone their buying to lock in good rates.

However, many banks do not always pass on the benefits of a falling interest rate to an existing borrower but would always increase the interest rates overnight. Interestingly a bank always focuses more on acquiring a new customer at a cheaper rate than incentivizing an existing customer. This is because once the home loan borrower has been locked at a particular rate, any exit options comes at a cost to the bank which is wholly passed on to the borrower. This can get tricky for the non-savvy borrowers. New investors must be wary of such gimmicks and thoroughly weigh options which suit their needs and budget and take into account increasing interest costs.

I always believe that it is personally better to go with floating rates especially when the government is able to rein in inflation to less than 6% and thus brings down the base lending rates to banks, which further passed on to the borrowers just as quickly. That would be the best for everyone but somehow, I don’t see that happening very often. And like the rest, I am happy to have a house in the end, despite the bureaucratic stigma of Interest rates and never ending EMI’s.