Lower interest rates – Bringing one closer to their dream home

High-interest rates and a slowing economy led most end users of property to reconsider their purchase decisions in the recent years. Further, 2016 saw the government delivering a ‘triple whammy’, comprising of the introduction of the Real Estate (Regulation and Development) Act, the Goods and Services Tax (GST) and the demonetization initiative. However, the year 2017 has seen some welcome moves that indicate things are looking up in this sector. Moreover, all the three measures listed above will create a much transparent economy, foster its long-term prospects and create more employment, pushing up demand for quality housing.

With the demonetization drive coming to an end, banks and lending institutions have seen a massive accumulation of liquidity, building expectations around a sharp fall in lending rates. Around the start of the year, India’s largest lender, the State Bank of India (SBI), has taken the initiative to cut its marginal cost of lending by 90 basis points and home loan interest rates by 45-50 basis points. It was soon followed by other biggies, such as PNB, ICICI, and HDFC. Such rates were last available 6 years ago, post which both real estate demand and capital values appreciated. For an end user, this represents a very good opportunity to purchase one’s dream home now. The reasons for this are not hard to see:

Lower interest rates = Lower EMIs

Lower interest rates means lower EMIs to be paid by home buyers
Lower interest rates mean lower EMIs to be paid by home buyers

Most end users are professionals and avail home loans to buy their homes. Therefore, a significant reduction in home loan interest rates translates into lower payouts against the mortgage. For example, if one is looking to purchase an apartment for a high-end project and avails a loan of Rs. 1 crore for the purpose. Assuming loan tenure of 20 years (240 months), the savings on equated monthly installment (EMI) under the applicable rate of 8.25% would come to Rs. 13.80 lakh approximately over life of the loan. Rs. 20.70 lakh approximately accrue as savings for one who goes for a loan of Rs. 1.50 crore in the same period (assuming the floating rate of interest remains the same). The table below further elaborates the numbers:

A hypothetical housing project having a starting price of Rs. 1.30 Crs.

IMPACT ON EMI

Loan amount in Cr. EMI at 9.15% New EMI at 8.25%  Saving in EMI (Rs.) Net Saving (Rs.)
1 90,940 85,207 5,733 13,75,920
1.5 1,36,409 1,27,810 8,599 20,63,760
1.75 1,59,144 1,49,111 10,033 24,07,920

 

Another hypothetical project, offering homes starting at: Rs. 4.2 Crs.

IMPACT ON EMI

Loan amount in Cr. EMI at 9.15% New EMI at 8.25%  Saving in EMI (Rs.) Net Saving (Rs.)
3 2,72,819 2,55,620 17,199 41,27,760
4 3,63,758 3,40,826 22,932 55,03,680
5 4,54,698 4,26,033 28,665 68,79,600

*Loan tenure = 240 months, i.e. 20 years

In addition, with banks having surplus liquidity and the benign inflation rate prevailing in the economy, interest rates may well come down further. As discussed earlier lower rates will further boost demand for housing which will push up property prices in due course.

Cuts in taxation

The Union Budget 2017 saw a reduction in income tax rates doing the rounds. Also, tax breaks and lower interest rates have been provided for the affordable housing sector. End users, hence, will have greater purchasing power and this should greatly boost economic growth. Higher incomes also mean higher needs for investments and real estate is a favored asset class for investors. Thus, the home that one wishes to purchase may not be available at these prices in coming time since it is likely to become expensive when demand revives.

Higher investment in infrastructure

During the demonetization drive, numerous government departments at various levels, which were allowed to collect their dues in the form of discontinued bank notes, have seen their hitherto empty coffers overflowing. A major chunk of these massive funds is expected to be invested in enhancing the infrastructure of towns and cities, in order to drive growth. Faster development of upcoming real estate hotspots along the further reaches of major cities such as Wagholi in Pune, Nallagandla in Hyderabad and Dwarka Expressway in Gurgaon will translate into higher property prices for the same area in the future.

Availability of Quality housing

Lowering interest rates on home loans makes purchasing a home cheaper
Lowering interest rates on home loans makes purchasing a home cheaper

The twin strikes of the RERA Act and demonetization have clearly emphasized the need for end users to go for projects by reputed developers. It is more important than ever to look for a property having a developer, who has built a strong track record for timely delivery and quality. These regulatory moves are expected to clear fly by night operators from the real estate sector, with only the serious players expanding their presence. Hence, the oversupply, leading to excess unsold inventory in the hands of developers, one sees today is unlikely to last long, which will again lead to a hike in property prices. Hence, for an end user, now is a great time to get better quality homes at a more suitable rate.

Primary market to do better than secondary

It was often found that secondary sales in residences used to be conducted through a mix of black money and legitimate funds. With demonetization, the former is no more in availability, hence hurting demand in the secondary market. Thus, end users who primarily dealt with legitimate funds are unlikely to see much supply in the secondary market. This will result in them flocking to primary market i.e. under construction projects of reliable developers, hence pushing up demand for it.

Conclusion

There is a famous English saying, “Strike when the iron is hot”. For an end user, events in the recent past and the possibilities in the near future clearly indicate that this is among the best times for one to take the plunge and purchase the home they have long desired, at a price which suits them. A combination of a crackdown on unscrupulous operators and transactions, more customer-friendly regulations, and financial incentives is a welcome indicator for home buyers to step in and make the purchase they were compelled to defer till recently.

The information has been curated from various sources and may not be verified as per RERA guidelines *
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