Home loan trends in 2015 – make smarter choices

Good time for Real Estate Investment?

An optimistic start to 2015 for investors as the Reserve Bank of India cuts down the Repo Rate by 25 basis points. This move has fuelled expectations of the lower rate of interest on Home Loans. While many banks are yet to announce interest rate cuts, there is hope of reverse inflation throughout 2015. Let us examine what this means for a home shopper.

What is Repo Rate?

Repo Rate is the rate of interest at which RBI lends money to other banks. A decrease in RR means RBI will now charge lesser interest on borrowing. Commercial banks are in turn expected to lower their lending rate on Home, Auto, and other loans. Fixed Rate Loans borrowed hereafter will have lower interest and tenure. Existing Floating Rate Loans will see a decrease in EMI’s and will continue to do so as the economy disinflates over the next twelve months.

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Fixed Rate Loans v/s Floating Rate Loans

Fixed interest rates imply that a borrower will pay a definite amount each month towards loan repayment regardless of market fluctuations. Floating rate of interest changes with ups and down in the market. This means a borrower will pay lower EMI’s when rates fall and higher monthly installments during inflation. Fixed rates are often higher while floating rates are offered at lower rates of interest at the time of borrowing.

Let us take a look at the current rate of interest of some of the major financial institutions:

State Bank of India: 10.10% – 10.15%

LIC Housing Finance: 10.30% – 10.95%

HDFC Ltd.: 10.15% – 10.50%

ICICI Bank: 10.10% to 11.25%

Axis Bank: 10.25%

Bank of Baroda, Union Bank and Bank of India are also offering a Rate of Interest equivalent to that of Axis Bank.

Some other trends seen:

• Axis Bank’s New Asha Home Loan Scheme for low income borrowers did good business covering Tier 1 and 2 cities.
• BOI and Dena Bank are offering processing fee waiver and interest rate concession.
• SBI, LIC and Tata Capital Housing Finance are offering special discount rates for women borrowers.

Which is better for me – Fixed versus Floating?

The economy moves in crests and troughs. The Economic Recession of the last decade brought home the vicious cycle of economic recession, depression, recovery, and boom to many of us. It is wise to invest only after carefully considering the present state of the economy.

Fixed Loans lock you at the same rate of interest for the entire term. If you borrow at high-interest rate that is about to fall in the foreseeable future, you will have to keep paying the high interest for the next 10 years. If at the time of borrowing interest rate is at a low, a fixed rate loan will ensure that you keep paying the low rate of interest even during tough times.

Floating rate means you win and lose the market. However, if market highs and lows give you sleepless nights or your lifestyle favors the certainty of a set deduction from your balance sheet every month, fixed rate loans may be better for you. If you are confused by the choice, a split loan may work the best for you. This basically means that your split your loan into 2 portions – say 50% fixed and the other 50% can be variable.

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Buying a House in 2015

Reduction in EMI when Interest Rate is cut: Interest Rate 10.50% 10.25% 10.00% 9.75% 9.50% EMI (on loan sum of 25 lakh for 20 years) 24,959.00 24,541.00 24,125.50 23,712.90 23,303.30 EMI saving N/A 418 833.5 1,246.10 1,655.70

Courtesy: The Financial Express, Thursday, Jan 19, 2015.

Reduction in Tenure when Interest Rate is cut: Original Tenure Rate at 10.5% 10.25% 10.00% 9.75% 9.50% 5 years Nil 1 month 1.5 months 2 months 10 years 2 months 4 months 6 months 8 months 20 years 1 year 2 years 2 years 8 months 3 years 4 months

Courtesy: Times of India, Times Personal Finance, Monday, January 19, 2015.

With stable governance in place and the economy looking good, analysts are suggesting that the year 2015 will see a steady fall in inflation and RR may be lowered by as much as 100 basis points this year. Times of India has quoted experts like Chetan Arya, Chief Asia Economist at Morgan Stanley saying that further 125 basis points reduction should be expected in 2015 and Soumya Kanti Ghosh, Chief Economic Advisor of SBI that anything between 75-100 basis points cuts will happen before March 2016. Other experts have made similar predictions based on the hope that the current government will continue with the fiscal consolidation. This is certainly good news for those who are planning to purchase their dream home in 2015.