Interest rates and escalating property prices had forced many prospective buyers to postpone their plans of buying a house. However, the recent easing of monetary policy by the Reserve Bank of India (RBI) has brought them relief in at least one aspect-lowering of interest rates.
Many public and private sector banks have announced a cut in their interest rates by 25 basis points. This means a reduction in the EMI that a borrower would have to pay. Suppose you had taken a home loan of Rs 30 lakh for 20 years at an interest rate of 11%. If the bank cuts its rates by 1%, resulting in a rate of 10%, your instalment will be slashed by Rs 2,000.
While this is undoubtedly a piece of good news, the recent regulation that has been introduced in the real estate sector has the potential to dampen your soaring spirits since it could impact your eligibility as a borrower and, consequently, your home buying decision.
If the interest rates drop, your eligibility as a borrower increases marginally, depending on the percentage of reduction. Says Adhil Shetty, chief operating officer of Bankbazaar.com: “While calculating the borrowing capacity of an individual, it’s typically considered that the EMI will be 40-50% of the net take-home salary.
So, if there is a substantial drop in the interest rate, his eligibility goes up.” This is because the borrower will be able to afford a higher EMI or be more comfortably placed to pay the same amount of EMI. However, Shetty says that most banks pass on the benefit only to new loan borrowers.
“If there is a drop of 50 basis points, the average borrowing capacity of an individual goes up by Rs 60,000-70,000, which is not much. Of course, this differs from case to case, but banks consider various other factors before offering a low rate even to new borrowers,” says Pankaj Maalde, head, financial planning, Apnapaisa.com.
He also advises that the fall in rates shouldn’t tempt you to prepay a loan. You will have to weigh whether the advantage of a lower EMI is higher than the prepayment penalty you may have to pay.