The chances of a further rate reduction are very low. However, mortgage borrowers should not ignore the possibility that rates will rise from current levels. Since rate transmission is now fluid, any rate increase by RBI will immediately impact their mortgage rate. Any increase in mortgage rates will increase the EMI (or loan term) and could mess up your financial planning.
For example, the EMI for a 20 year home loan of Rs 1 crore will be Rs 75,739 at 6.7%. The same will go up to Rs 81,787 at 7.7% and will rise to Rs 88,052 at 8.7%. The best thing to do in such situations is to go for fixed rate loans. However, the options are very limited and only a few options offer fixed rates also for a limited period. More importantly, these partially fixed rate home loans also charge higher interest rates.
Partially fixed loans will cost you more
Consider the additional costs before opting for partial fixed loans.
While these rate increases are not in your hands, you can prepare for them by assuming a higher interest rate. “Instead of the very low rates currently, assume a reasonable mortgage rate of around 8.5% and always invest the remaining EMI elsewhere,†says Aparna Ramachandra, Founder and Director of Rectifycredit.com. For example, the EMI for a 20 year home loan of Rs 1 crore is Rs 86,782 @ 8.5% and will be Rs 75,739 @ 6.7%. You should invest the difference of Rs 11,043 in a short term debt fund each month. This corpus will serve as a backup if prices go up. You will be in a better position even if the rate does not increase because this money will be saved instead of being spent.
Take a mortgage? Make sure your financial plan is not affected, ask yourself these 5 questions …
Can you afford a home loan?
You too, like many others, might be tempted to put those interest rates at a decade’s low on home loans and make the most of the lower home prices before things start to pick up and go. get back to normal. While these external factors seem attractive, the decision to take on more debt to buy a home also depends on certain factors about you and your finances.
For many, buying a home means stretching finances to an uncomfortable limit and stretching too thin in the process. Before you apply for a large home loan, make sure you are on a solid footing when it comes to your personal finances and goals. Ask yourself these five questions about your emergency fund, down payments, EMIs, and the status of other financial goals, to make sure your mortgage doesn’t end like a noose around your neck.
Is your emergency fund in place?
Before even starting to calculate the numbers, you need to make sure that your foundation is in good shape. The emergency corpus should be large enough to cover all of your expenses for the next 12 months. This should also take into account the new EMI commitments on mortgage loans. This is to provide an immediate financial cushion in the event of loss of income due to job loss, accident or prolonged illness. Having this stamp when repaying a large mortgage has proven to be essential over the past 18 months.
Is the deposit too large?
Banks require borrowers to shell out 20% of the property’s value up front before agreeing to sanction a loan for the remaining amount. However, you can put a higher amount if you want. For a property priced at Rs 90 lakh, the maximum loan allowed will be Rs 72 lakh, which means you pay Rs 18 lakh as a down payment. Moreover, you also have to pay a few lakhs for stamp duty and GST, the latter only if you go for a property under construction. Together, this expense is a nice sum for the majority. Even so, financial advisers generally suggest going for the maximum possible down payment.
A smaller loan component not only invites lower interest rates and reduces the burden on the EMI, but also reduces total interest expense and allows for faster repayment, Joshi insists. Still, borrowers shouldn’t dump all of the accumulated savings into the down payment. When you figure out how much savings you have for your down payment, keep your retirement and other essential life goals in mind. Do not withdraw the money set aside for these purposes. Also consider expenses for renovations or furnishing your new home. Then, after having provided for the emergency corpus cushion, what remains can be invested in the down payment. In addition, a large down payment will become a strain on your liquidity.
How much will electromagnetic interference weigh on you?
Another tricky aspect is budgeting for EMIs. Typically, a bank assumes that around 50% of your monthly disposable income is available for repayment. No bank will grant a loan beyond this threshold. This includes your current EMI engagements, if applicable. “Some banks have become aggressive and are ready to go beyond 40% EMI if the borrower meets certain criteria,” said Rohit Shah, CEO of Getting You Rich. But the lender’s internal EMI cap may not be realistic for everyone. For example, if you earn Rs 1 lakh each month and incur expenses of Rs 60,000, then a Rs 40,000 EMI is simply unaffordable. You would live day to day in such a scenario. If you are buying a property under construction, you will likely be paying rent with your EMI. Make sure you can afford it even if the bank is willing to give you a large loan. Stretching your budget is okay to a point as your earnings will increase, but IMEs will not. But don’t go too far.
Do you know tax mathematics?
Some borrowers are simply sold on the tax benefits that a home loan allows under income tax rules. These deductions, which effectively reduce the cost of the loan over its lifetime, often result in borrowers making heavy EMI commitments. But remember that these benefits only accumulate up to a certain threshold. An individual is entitled to deductions of up to Rs 2 lakh per year for interest payments on home loans. If you pay off a 20 year home loan of Rs 75 lakh at 7% interest, the interest expense will exceed Rs 2 lakh for several years. Even if you go for a joint home loan with spouse where both husband and wife can claim a deduction of Rs 2 lakh each per year, the deductions are well below the actual interest of the first few years. So do not extend the EMI mortgage for the sole tax benefits.
