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The Reserve Bank of India (RBI) on April 9 announced another 25 basis points cut in the repo rate, following a similar reduction in February. This move was widely anticipated, especially after the RBI Governor had hinted at further rate cuts in the previous review. With this, the central bank has now delivered a cumulative 50 bps cut so far.
But does this mean it’s the right time to buy a house? The answer isn’t so straightforward. While lower interest rates can make home loans more attractive, several other factors need to be weighed before making such a long-term financial commitment. Home Loan EMIs To Reduce An interest rate cut of 25 bps will naturally mean that equated monthly instalments will come down.
Let us see what happens in the case of three scenarios. If you take a home loan of ₹ 50 lakh, the EMI at the original interest rate of 8.25% would have been ₹ 42,603.
However, with the revised interest rate of 8%, your EMI will now be ₹ 41,822. This results in a monthly saving of ₹ 781. Over the full loan tenure of 20 years, this translates to a total interest saving of ₹ 1,87,507.
For a home loan of ₹ 80 lakh, the EMI under the original interest rate of 8.25% would be ₹ 68,165. With the revised rate of 8%, the EMI comes down to ₹ 66,915.
That’s a monthly saving of ₹ 1,250 and a total interest saving of ₹ 3,00,011 over 20 years. Also Read: Planning to invest in property this financial year? Here are 5 things to keep in mind In the case of a home loan of ₹ 1 crore, your EMI would have been ₹ 85,207 at 8.25% interest.
With the interest rate now reduced to 8%, your revised EMI would be ₹ 83,644. This brings you a monthly relief of ₹ 1,563, and over the course of 20 years, your total interest outgo will be lower by ₹ 3,75,014. Should You Take The Plunge? Lower interest rates are definitely good news.
But this alone should not be a reason to buy a house. “In the present scenario, look for stability of your income. The US is expected to go into a recession and even though we may not be in a technical recession, there could be a general slowdown and repercussions in terms of job losses.
Buying a home is a long term commitment, so one needs to make a financially sound decision,” says Abhishek Kumar, Securities and Exchange Board of India (Sebi) Registered Investment Advisor (RIA) and Founder and Chief Investment Advisor, SahajMoney, a financial planning firm. The basics of financial planning, which says that your home loan EMI should not exceed 30-35% of your take home income should be in place. Also Read: Planning to sell your property? Here’s why timing it after April 1 makes financial sense A rate cut should not be the sole reason to delay or avoid buying a house.
If someone has a genuine need, sufficient funds for the down payment, and the confidence to comfortably service the EMIs, they should proceed with their decision. However, it’s important to maintain a financial cushion, as interest rates—though currently trending lower—can fluctuate over time. “That’s why it’s important to have a long-term commitment and plan for that slight variability.
The real criteria should be clarity on whether you want to buy the house now, in the place and city you are choosing, not just the home loan rates, because that’s something that will always remain variable over 15 to 20 years,” says Suresh Sadagopan, founder of Ladder7 Financial Advisories. Also, one needs to remember that the RBI rate cuts generally lead to lower home loan rates, especially for those linked to external benchmarks like the repo rate. However, the reduction may not be immediate and is likely to occur at the loan's next interest rate reset, when banks adjust their lending rates.
To sum up, this is certainly a reason to rejoice, but it is important to be on a financially sound footing before you buy a house. Anagh Pal is a personal finance expert who writes on real estate, tax, insurance, mutual funds and other topics.
