Hello Readers!

Currently, interest rates or lending rates of banks and financial institutions are trending at its low. And after the announcement of cutting down Repo Rates by RBI, the home loan rates are moving below 8% annum for many banks.

Low home loan rates would effectively decrease the EMI per lakh. Thus, many people are taking this time as the right to buy a house. Well, here the question is, does lowering of interest rate and home loan rates, make a strong case for buying a house now?

If you are planning to buy a house in the current time, do check the following things discussed.

CHECK YOUR CASH INFLOWS

Buying a house is a big financial decision, before this, it is necessary to plan and get yourself stable regarding your income for the next many years. In the current situation, many businesses and companies are suffering an economic loss, due to COVID-19 and lockdown. Many companies to cover this loss have resorted to a pay cut or axed jobs altogether.

So basically, at this time it is much necessary for you to check your cash inflows and do check its stability for over a period of time. In case if you buy a house today, and after 6 months a sudden break applies to your income, it could impact your ability to repay the loan.

If you are not sure about the stability of your income over a period, I suggest postponing your buying a house decision for some time.

LOW-INTEREST RATE WILL NOT ALWAYS BE THE SAME

Banks issue two kinds of home loan rates, one floating, and another fixed. Floating home loan rates are not always the same, move up and down with changes in the interest rates in the economy. After October 2019, the home loan rate is now aligned to Repo Rate. Thus, now with changes in the repo rate, the interest rate on the loan will change accordingly.

The fixed-rate offered by banks on a home loan is fixed only for 2 years, after that the depositor must pay his home loan in premium.

However, as the interest rates are trending at its low, the odds of interest rate going up are higher. And with lack of a fixed-rate loan option, there are chances of a spike in rates that may impact your EMI’s and cash inflows.

DO CHECK YOUR CREDIT SCORE

It is advised to maintain a good credit score, as your high credit score helps you lower your interest rate on the home loan. Also, it is necessary to maintain your credit score during your loan duration. Because if your credit risk analysis undergoes changes during the loan tenure, it will make banks revise your interest rate upwards.

So, always try to keep your credit score high.

DON’T STRETCH

As per people, the loan eligibility amount declared by the banks is considered as the right parameter for their repaying eligibility. While by financial experts it is advised that your EMI amount should not exceed more than 25% of your take-home salary.

As per the survey of RBI, it has been analyzed that 40% salary of many people is used in paying the EMI of their home loan. This has made housing affordability worst in many cities, like Mumbai, Ahmedabad, and Pune.

It is also advised to people that you must have 20 percent of value your home loan to make as a down payment. If you don’t have it, start a house fund by investing systematically into a mix of equity and debt mutual funds to get there.

Interest rates are low, and this has made buying a house affordable for many. While on the other side it can also be said that their interest rate might shoot up with the increased interest rate in the market, at that time it will become a burden on them. Also, during this uncertain time, it's hard to maintain the stability of your income. Thus, it is advisable to do consider these things before you buy a house.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).