Time to wait as home loan rates may fall further

Time to wait as home loan rates may fall further

The rate cuts announced by banks and home loan companies are below expectations. It makes sense to wait for some time to get a sweeter deal on balance transfer
Large home loan lenders including HDFC, ICICI Bank, SBI and Axis Bank announced cut in interest rates. The cut in interest rates ranged between 10 basis points to 25 basis points, wherein one basis point means 100th part of one percentage point. Though the rate cut cycle for the home loan customers has begun, experts point out that it is nowhere closer to where it should be. “The cut in interest rates on home loans announced last week were below expectations. Only good thing is some large banks opted to pass on the benefits to the existing customers.”

We can expect further cut in home loan rates in near future, making home loans more attractive. The much awaited action on the home loan rate came after Raghuram Rajan, Governor of Reserve Bank of India, expressed his concern over the banks’ failure to transmit the cut in key interest rates. HDFC and SBI announced rate cut of 25 and 20 basis points. 

Banks generally prefer to reduce the loan repayment term by keeping the equated monthly installment (EMI) at the same level. For loan amount of Rs 50 lakh to be repaid in 20 years, a cut in interest rate from 11% to 10.75%, will lead to reduction in repayment term by 13 months – that is the loan gets repaid in 18 years 11 months, instead of 20 years. If you choose to keep the term constant the EMI goes down. In the above case, EMI changes from Rs 51,609 to Rs 50,761 - saving of Rs 848. “Always keep EMI amount constant when the rate is cut. This ensures that you become debt-free sooner,” advises Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. 

Though the experts are of the opinion that the rates are on their southward journey, they differ on the magnitude and the timing of the rate cuts. One can expect more cut in interest rates round the corner, as more banks join the party and interest rates in the economy further go down. However some believe that there may not be a rate cut in near term. Rate cuts will be a gradual process expected to unfold over next two years. As the interest rates move down, the only question the home loan customers ask is – How to make the most of these fall in home loan rates? Though the new home loan customers do benefit from lower interest rates, not all lenders are offering the lower interest rates to their existing customers. What if your bank is not offering you lower interest rates whereas it is offering lower interest rates to the new customers. Balance transfer is the way out, say experts. It means the borrower shifts his outstanding home loan to a bank that is offering lower interest rates. 

“Don’t be in a hurry to shift your home loan, if your bank is not lowering your home loan rate. Most probably it will lower the rates in a month or two, due to pressure from other banks to remain competitive.” If the bank still does not cut the interest rate on your home loan you can consider approaching other banks. “Balance transfer makes sense if the difference between your existing home loan rate and the new home loan rate on offer is at least 75 to 100 basis points after accounting for fees associated with balance transfer.” Longer the remaining tenure of your home loan, better off you are with the balance transfer. 

“If you are buying a home for end-use, this is the best time as home loans are going to be cheaper and the developers are offering good deals. However, if you are opting for a home loan to fund an ‘investment’ in a residential property, do not forget the fact that the real estate prices may remain weak for prolonged period of time.” While taking a new home loan or opting for a balance transfer, do not forget to read the fine print. Also do purchase a term life insurance policy that offers to pay the home loan in case of eventuality.

Happy Investing

Source : Moneycontrol.com