In the third bi-monthly monetary policy statement, as expected by the industry the Reserve Bank of India (RBI) cut the policy rates by 25 basis points. The repo rate now stands at 6% which is the lowest in the past 7 years. As a result, one of the direct implication of this move is expected to be cheaper loans for borrowers. But can rate cuts alone help revive the realty sector in India?
Just few weeks ago one of the largest bank in the country, State Bank of India (SBI), had cut its saving bank account rate from 4% to 3.5% per annum, indicating an expected downtrend in interest rates. In the past when SBI had lowered its lending rates, other leading banks had followed.
Every bank offers loans at different interest rates. The current lending home loan rate from leading banks ranges between 8.4 to 8.6%. Depending on the loan to deposit ratio many banks are expected to cut their home loan rates and in coming months lending rates might fall in the range of 8.2 to 8.5% per annum.
Let’s do a simple calculation to understand how much would a borrower save with this approximately 0.2% cut in home loan interest rates. For a INR 30 Lakhs loan for a tenure of 20 years a borrower would pay in total (Principal plus interest) INR 62,48,327 when paying EMI at 8.5% interest. For the same amount and tenure at a 8.3% home loan interest rate he would be paying INR 61,57,488. This difference of INR 90,839 over a 20 year time frame is not significant, but it is still counted as saving. This coupled with expected marginal reduction in property prices post GST, would have a high impact on property prices.
Usually the banks offer lower interest rates only for fresh loans. Existing borrowers should also make calculations to check if it makes sense to shift their loan account to another bank offering lower interest rates or renegotiate with the existing bank for a reduced interest rate.
What should property seekers do in the current market?
- Genuine buyers should start looking for a property as home loan interest rates are low and they are soon expected to go further down.
- With festive season around the corner many developers would soon come up with attractive offers and deals and property seekers should do their research beforehand to take advantage of these deals.
- On one hand post demonetisation banks have had excess liquidity and on the other hand they have also witnessed sluggish lending from borrowers. So this festive season many banks who want to build their books will try and attract potential buyers.
- Besides Home loan interest rate borrowers should consider other factors like pre-payment penalty if any, foreclosure penalty, reset period, clauses for switching to another bank in the future etc. before finalizing their home loan.
By Ganesh Vasudevan, CEO, IndiaProperty.com
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