Leveraging the Home-Loan in the backwash of COVID-19
A lot of us would have been hit by the thought of investing in real estate at this time.
Here’s the question. Are we just going to slouch in our beanbags, watch online streaming web-series and movies & wait for some magical moments? Or be responsive with an open mind to make the most of this opportune situation.
Taking such unconventional decisions at these unpredictable times seems tough but rational evaluation basis facts and government reforms will help us take the next logical move. Opportunities don’t come knocking our doors very often. However, when they do, we’ve got to be ready to encash upon the same. We don’t need some tools to ideate that real estate is the best bet even in adverse times. Rather, buying real estate during such situations is going to prove as the most intelligent move.
Support has come from Reserve Bank of India’s (RBI) monetary policy decision earlier in March 2020 to slash repo rates by 0.75 basis points (bps). This move enables Home-Loans attractive providing potential home buyers with an opportunity one cannot afford to miss. The steep cut has brought interest rates on home loans by public and private sector banks to their lowest in over a decade.
It’s definitely good news for those chasing a life goal to own a house, more so for those waiting for the right time to take the plunge. If you’re among them, then wait no further.
Let’s understand this thoroughly.
A home-loan for an amount of INR 1 Cr availed for a period of 25 years at Interest rates of 8.5% and 7.75% would result in an EMI of INR 80523 and 75533 respectively. This leads to an upfront monthly savings, owing to less EMI payment, of INR 4990 which could also be utiilsed for an additional Home-loan of INR 6.5 Lakhs for interiors and furniture of the property.
Now, let’s understand that the tax benefits on principal and interest payments under various sections of the Income Tax Act will enable the borrower to further save annually an amount of INR 109000, thereby, leading to an effective EMI saving of an amount of INR 9100. This arrives to an effective rate of interest savings by over 1% on the Home-Loan availed.This gets the Home-Loan applicant even more advantages, in case of a Joint Applicant status of the Home-Loan availed.
Going a way farther, the tax benefits owing to the second house can not be neglected and one can make the most of the present scenarios to reap more benefits. While the tax benefit on the self-occupied house is 2.5 Lakhs, the gain in case of a second house is more at 2.72 Lakhs.
Furthermore, in case of the property featuring in the affordable segment, the benefits of CLSS add upto the benefits of a further 1% of the rate of interest.
Another benefit of the current home loan interest rate scenario can be the exercising the option of floating and fixed rates. Banks and other financial institutions typically charge a premium for home loans at fixed rates. So, this option is best availed when overall interest rates are at their lowest. The home loan borrower is able to lock the fixed-rate at a lower level and get rid of the stress arising out of the interest reset practices followed by various lending institutions.
Those looking to acquire a property for investment purposes and earning rental income have their own set of benefits. Rental yields are currently pegged at 2-3%. And with effective interest rates at 6.75%, the net effect, if a home is purchased for letting out, comes to around 4% which beats long term inflation figures of India hands down, thus presenting a beneficial situation to the investor.
Buying an apartment is the most expensive financial commitment that an individual makes in his/her lifetime. Keeping the overall acquisition cost in mind, the mid-segment and affordable housing categories have emerged as the most sought after for potential buyers. Property prices are at their lowest across most cities. With stable prices, a raft of offers by various A-listed developers, and reduction in repo rates by RBI, it can’t be hotter an opportunity than this. So, strike it…and strike it hard while it’s hot. And you will reap the potential benefits of this investment in the years to come.
An opportunity, in the form of lowest home loan interest rates, is now available. Go ahead, make its best use and fulfil your life dream.
References: Media Reports, Press releases, Union Budget, RBI Release, PMAY-HFA(Urban) CLSS Calculator
Disclaimer: This information has been collected through secondary research and Area infinity is not responsible for any errors in the same.
