Should You Really Take That Home Loan?

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Workers work on the construction site of a residential complex in Kolkata.
(Photo by Debajyoti Chakraborty / NurPhoto via Getty Images)

Sreejit Nair (name changed), a 34-year-old information technology (IT) worker at an Indian conglomerate, has spent the final months of the pandemic searching for the perfect home to move into. He sold his existing house for a loss of almost Rs 4 lakh during the pandemic and has now purchased an 865 square foot ready-to-move-in apartment, for Rs 1.07 crore in Thane. The price includes all costs. Of course, he completed the purchase with a home loan, which is attractive these days. With his credit rating, he managed to borrow at 7.10% from the state lender SBI. He is not alone in this home buying frenzy, visible in some pockets of the country. According to data from CRE Matrix Research, a real estate research firm, sales in Thane and the central suburbs of Mumbai had fallen to zero in April this year, but managed to rebound to 5,839 units in September. Although this figure is still far from the peak of 8,259 home sales in January, a recovery on a monthly basis is visible. Does that mean you should go after this home purchase? Abhishek Kiran Gupta, CEO of CRE Matrix, says if you are considering buying a ready home, now is the time. But for a property under construction, you can bide your time. He adds that if there is a trend reversal, around 70% of Thane buyers are now buying homes for personal use, compared to those for investment. One of the reasons for the increase in sales in Maharashtra is the government’s decision to reduce stamp duty rates, which has reduced property prices statewide, including helping sales to Mumbai and Pune. Recently, veteran banker Uday Kotak tweeted about Kotak Mahindra Bank’s 6.75% home loans to its 1 million subscribers, saying, “… covid has made our home the center of life. Lower prices, lower stamp duties, lower interest rates could support home values ​​in the future, just like in the good old days! While it is undeniable that mortgage rates are at their lowest levels in decades, there are some key factors you should consider before signing that check.
First, assess your financial situation. Vishal Dhawan, Founder and Managing Director of Plan Ahead Wealth Advisors, says that before anyone starts to think about owning real estate, “… the first thing to consider is the stability of their income, and if salary can see any likely impact for the next 20 to 30 years. Following the 2008 global financial crisis and now the Covid-19 pandemic, which took the world by surprise, a common thesis is the increase in black swan events across the world and preparation for such blinding events. Added to this are the growing disruption and instability in the workplace. “Buying a home tends to trump all other financial goals and decisions. It’s a tempting idea to expand into a slightly larger apartment or upgrade to a better view, due to which people tend to stretch. First buy, then renovate the apartment. Dhawan reasons. Whether you are single or buying a house as a couple, your equivalent monthly payment (EMI) to income ratio should not exceed 30 percent per month, says Dhawan. This means that if you earn Rs 100 in a month you should keep your NDE at Rs 30. If you end up paying more than that it would mean you have to start deducting money from other activities including the existing rent, this annual leave. , regular outings and so on. If you have high medical expenses in the family, be careful before stretching your budget. “Ideally, one should be able to pay 20-25% of the value of the apartment as a down payment to reserve the house. If you can’t afford it, don’t consider buying a home just because rates are low today, ”says Suresh Sadgopan, founder of Ladder7 Financial Services. So if your house costs Rs 1 crore, you need to pay Rs 25 lakh in advance to reserve it. In fact, Sadagopan says, you would have to have a safe 40 percent pot – in this case Rs 40 lakh – to be able to pay in equity, and the rest can be a loan.
Paying your token money isn’t the only capital you should have. If you are single, you must save a year of expenses, including your EMI value, before signing up for this pledge. While couples find it a little easier, experts who Forbes India spoke to advise them to avoid stretching their joint loans too much, as this will not allow a partner to take a break from work if they want to. The loans are for a 20 to 25 year commitment. While some state governments and central government are trying to reduce circular rates and stamp duty registration fees to make money from home registration, residential rates have also fallen across the board. cities, especially in Mumbai. “Over time, there has been a price correction. A house that cost Rs 70 lakh in 2012-13 continues to cost roughly the same price, which means that the real value of the house has gone down. In some cases there is an additional correction so if you have enough savings you may want to consider buying. But that does not mean that the prices will rise quickly, and there is no need to rush the decision, ”adds Sadagopan. India has enough unsold homes you can tap into, so you won’t lose much by not signing the check immediately. The next issue that worries potential buyers is low interest rates (see graph).
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Kotak Mahindra Bank now offers the lowest rate. Ambuj Chandna, President of Consumer Assets at Kotak, said, “The cost of home ownership is going down and we are seeing a reflection of that as business volumes are increasing month to month. Besides the average retail lending, over the past 20 days we have also seen a lot of big ticket offers over Rs 2 crore. Kotak is currently offering a rate of 6.75% to a customer with a credit score of 750 and above and a loan-to-value ratio (LTV) of 80% and below. In many banks, the lowest rates are reserved for affordable home loans and very high credit scores. While the numbers look tempting, mortgage rates are “floating”, meaning they will change based on external benchmarks or repo rates. The repo rate is the rate at which the RBI lends to banks. This rate changes according to RBI policies. Dhawan says, “The lending rate is reset every time the RBI changes it, so if six months later the central bank firms the rate, your interest charges will go up. You have to be prepared for such ups and downs for the next 20 years. Banking, real estate and personal finance advisors all believe interest rates are at the bottom of the cycle. Inflation based on the Consumer Price Index (CPI) is 7.61 percent, well beyond the RBI’s comfort zone, causing a headache for central bankers. Rates are expected to only rise from here rather than fall. “Interest rates have bottomed out and during the pandemic a lot of people were able to save money, which they use to buy a new home or get a better deal with developers for existing purchases. While rates are set to rise from here, we are also seeing sales where projects are ready to move into, but not for those under construction, ”says Abhimanyu Sofat, head of research at IIFL Securities Ltd . While most banks are not. by pronouncing the words “fixed loan” plus, there is no harm in checking if you can find a fixed cost loan. This means that the rate is fixed and final, not floating or dependent on external factors. Sadagopan says, “We are at the end of the bearish interest cycle. Banks or mortgage agencies won’t show much interest in offering fixed rate loans, and even if they do, they will offer very high rates that will dissuade people from taking them. While many people are considering buying homes now, they shouldn’t ignore the fact that rents have also gotten cheaper. This means that your rental yields have gone down. In most Indian metropolises, rental yields are 2-3%, while you will borrow at 7% on your loan. Even though the Indian economy is slowly recovering, the pandemic is not yet over and the labor market has not yet recovered in the country.

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