One of the Reserve Bank’s initiatives to salvage the economy during the COVID-19 pandemic has been to keep interest rates low across the board for several quarters now.
Resultantly, home loan rates have fallen steadily across the board over the past year, with lenders offering loans at rates as low as 6.5 to 6.7 per cent. It has now become significantly cheaper to own a home – a 1.5 per cent drop in home loan rates on a 20-year loan of Rs. 80 lakhs has an approximate monthly impact of Rs. 8,000 – roughly Rs. 1 lakh per annum – on your EMI.
The question on everyone’s mind at this stage seems to be: should you rush in to take advantage of the reduced rates and buy a home? Unfortunately, there’s no right answer to this question. The decision to rent or buy a home must be made in the light of your unique circumstances and life stage.
First, consider the precise dynamics of the decision to move from being a renter to a “leveraged” home owner. Rental yields, depending upon the place you live, will likely range from 2 to 3 per cent- implying that (in the majority of residential areas), you’d be able to rent a home with a market price of Rs. 1 Crore, for something in the range of Rs. 16,000 to Rs. 18,000 per month. If you were to buy the same home, however, you’d be required to make a down payment of Rs. 20 lakhs, and pay an EMI of approximately Rs. 71,000 per month for a 20-year loan, thereafter. Not only will the move to buy a home absorb a significant chunk of your liquidity, but (in this example) also require an additional outlay of Rs. 45,000 from your monthly cash flows. This isn’t an insignificant amount.
It follows from the above stated that taking a loan to buy a home as an investment simply doesn’t make financial sense right now, unless you’re privy to some top-secret information about a specific location that will unlock an inordinate amount of value over the next 3-5 years! Rs. 45,000 alone, put away in a monthly SIP for 10 years will grow to over 1 Crore in the next 10 years, at a reasonable estimate of 12 per cent CAGR. In 10 years, you’ll have built up roughly 55 per cent equity in your property (after making an initial outlay of 20 lakhs, mind you). While the real estate cycle is showing signs of life after an extended hiatus, the breadth of its sustainability over the next decade is anybody’s guess, and will depend upon a multitude of factors – including overall infra development, the successful and seamless implementation of RERA, the state of the overall economy – and of course, the shape and form of COVID and it’s a multitude of mutant variants!
If you’re considering buying the property as an end-user, with no immediate intent to sell, the drivers of your decision must be different. Don’t fixate upon the interest saving and make it the decisive factor. Consider other, critical factors such as the infrastructure set up in the neighbourhood, the reputation of the developer, the proximity to civilization and the safety of the area before you make a call. Consider your unique life stage and the nature of your work. Are you likely to be uprooted periodically, as your work takes you perforce to distant and exotic places? Or are you firmly entrenched in your current location, professionally speaking – or perhaps in a work from the home profession? Either way, if your situation warrants that you stay flexible with your location at short notice, continue to rent a home and do not be in a hurry to buy.
To sum up, do not rush into real estate as a leveraged investment right now. With the bugbear of inflation looming large, we may very well see interest rates going up from here – meaning that your repo linked or MCLR linked floating rate instalments may spike. If you’re buying as an end-user, consider your unique life situation before signing up. Remember that a home loan is a long-term contract, and your equity in the property will build up at a snail’s pace. A misstep could cost you heavily.