Indians Should Carefully Examine the Benefits Paying Off Their Home Loans

By Vipin Agnihotri

There is quite a rush among Indians to repay the home loans in view of the increasing interest rates. But the question now arises: Is it the right move? The India Street decided to analyze the whole situation.

In the last one-year, interest rates on home loan have increase substantially. In terms of statistic, the rates have gone up from around 7.5 percent in 2005 to 9 percent in 2006 and further to around 12 percent at present. In my opinion, this has led to rise in the equated monthly installment in the last one-year by around 23 percent and by 37 percent since 2005.

It has come into the notice of The India Street that as the interest rates on home loan has increased; plenty of borrowers are considering pre-paying the loan from their savings. But if experts are to be believed, one should just not rush to withdraw for his savings like provident fund to pre-pay a part of the home loan.

In my opinion, first and foremost you should try to find out the net cost of your home loan after adjusting for tax advantage. Once you are through this step, you should ascertain the return your savings are generating. Theoretically speaking, if the net rate of return of your saving is higher than the net cost of your home loan, you need not retire the loan by dipping in such saving.

On the other side of the coin, if the return from a particular investment of yours is lower than the net cost of home loan, it is recommended that you pre-pay the home loan from such savings. It is worth mentioning in this regard that there is no penalty for pre-paying of your home loan from your savings.

In terms of tax benefit, first you should ascertain the tax benefit that you get because of repayment of the home loan. If you take into account Section 24 of the Income Tax Act, you will realize that you are subjected to a deduction of up to Rs 1,50,000 from your taxable income against the interest payment for your home loan. Similarly, according to Section 80C, your taxable income will get minimized by the principal up to Rs 1 lakh repaid during a year.

All in all, if you have money lying idle in the savings account, where you are earning a return of 3.5 percent you should prepay the home loan from your such savings.

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Waiting for Interest Rates to fall not a Good Strategy

By Vipin Agnihotri

The people of India wait with bated breath for home loan interest rates to fall. There is no doubt that the average Indian dream of owning his own home is stronger then compared to other impulses.

It is correct that interest rates have never been higher. It is equally correct that there is little likelihood of them falling significantly in the near future. Moreover, the magnitude of property prices in cities such as Mumbai and Delhi compound the difficulty of the situation.

The present wait and watch game large chunk of buyers are playing is mainly based on two factors. First and foremost, home loan interest rates will soon fall and secondly there will be a correction in the property market and property rates will come down.

All in all, the average Indian has put his dream for a home on indefinite hold, assuming that lower property prices and minimized interest rates are just around the corner. In my opinion, this is not a reasonable stance to take because there is no likelihood of property rates in Mumbai, Pune and saturated cities such as Delhi and Bangalore coming down. If experts are to be believed, the demand is huge and the supply nowhere matches it. “It is a seller’s market and will remain one- at least for the short to mid term,” pointed out Kadam Khan,” real estate expert.

Another important factor is that people tend to misunderstand the dynamics involved in lending rates. Point to be noted here is that government cannot arbitrarily lower rates, since they are attached to the global value of benchmark commodities such as oil. The pressures that the Reserve bank of India is subject to are inflexible.

That is where it makes little sense to wait for home loan interest rates to ease before investing in something as important as a home for genuine self-occupancy. In my opinion, it is highly unlikely that interest rates will ease in the foreseeable future. Consider along with the fact that property rates will not drop either, it is crystal clear that the best time to buy one’s first home is now.

Furthermore, it is worthwhile to note that despite the soaring interest rates on home loans, buying a property is still among the safest investments available at the moment.

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Indian banks to Raise Interest Rates despite RBI Capital Reserve Reduction Change

The banks’ move will hurt consumers even though not RBI’s intention

By Vipin Agnihotri

Indian banks do not appear to be inclined to take a cue from the Reserve Bank of India (RBI) on minimizing interest rate for home loans below Rs 20 lakh. Instead, it has come into the notice of The India Street that they are raising interest rates on loans above Rs 20 lakhs in housing sector.

It is worthwhile remembering that in the April credit policy, the Reserve Bank of India minimized the risk weightage on the home loans below Rs 20 lakh and expressed the hope that banks will pass on the benefits to the customers. On every loan that a bank advances, a bank has to seta aside capital in its books.

If experts are to be believed, the extent of capital needed is judged by the risk weightage or the regulators perception of the ‘riskiness’ of the loan. This risk weightage was minimized from 75 basis points to 50 basis points.

This clearly emphasizes the point that for every Rs 100 of home loans, a bank will now be required to set aside capital of Rs 4.50 against Rs 6.75 earlier. This is considering a 9 percent capital to risk weightage ratio that banks are now required to maintain.

However, with an exception of Union Bank of India, a number of banks have raised interest rates on home loan above Rs 20 lakh. For example, Punjab National Bank have raise interest rates on floating and fixed rate loans above Rs 20 lakh by 100 basis points on the card rate while Oriental Bank have raised rate by 75 basis points for floating rate loans and 125 basis points for fixed rate loans over the card rate for loans that are above Rs 20 lakh.

When The India Street asked senior bank officials who raised rates, instead of passing the benefits to the existing customers, they justify their stands by saying, “The move to lower risk weightage frees bank’s capital which can then be used to increase lending or minimize lending rates for the existing customers. We have decided to lend more.”

India’s biggest bank, State Bank of India has decided not to minimize interest rate on home loans below Rs 20 lakh and the most aggressive home loan lender, ICICI bank, too seems to have taken a similar stance. Other banks such as Allahabad bank and Dena bank too are not considering revising their rates.

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