Should we take advantage of low mortgage rates?

This week, Housing Development Finance Corp. joined the State Bank of India, Kotak Mahindra Bank and Bank of Baroda to cut mortgage rates on home loans. These rate cuts are offered to both salaried and non-salaried borrowers. Mint takes a look:

Should you buy a house because the rates are low?

Home loan interest rates are just one of the many factors to consider when buying a home. Financial advisers generally advise buying a home if you are buying it for living and not as an investment. In fact, buying a home for most individuals is a large, illiquid and undiversified investment. In other words, you can’t sell a house quickly if you need the cash, and you can’t easily sell a part of it if you need a small amount of money. This is different from investing in stocks and mutual funds, which can be sold faster and in part.

Should you buy a house if you are renting one?

In today’s economy, people often change jobs and move to another city of residence. Buying a home in a city makes this process more difficult and reduces your ability to relocate. The covid-19 pandemic has also resulted in the tendency for people from different fields to work from home. This has reduced the need to buy expensive homes in the big cities. On the other hand, buying a home saves on rent and this can be a net financial positive in the long run. Compare the cost of buying a home with the annual rental cost, before making a decision.

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A difficult call

What are the costs of buying a home?

Buying a home involves making a down payment from your own savings. Then there are the equivalent monthly payments (EMI) to be paid on a home loan, if there is one. Other costs include stamp duty, brokerage and registration fees, as well as the cost of regular maintenance, parking fees, property tax, and the cost of repairs.

What about tax savings?

You benefit from a deduction up to ??1.5 lakh under section 80 C for the repayment of the principal of a mortgage and a deduction up to ??2 lakh on interest payments under Section 24B. If you record these deductions, the effective interest rate on your home loan goes down. However, section 80 C can also be used for other types of investments such as share-linked savings plans (ELSS) or public provident funds (PPF). The money used on mortgage interest could also be used to obtain tax deductions elsewhere, such as contributions to the national pension system.

Can you block low rates?

The short answer is no. In most home loans, the interest rate is variable in nature. It goes up and down in sync with the overall rates of the economy. Most banks have linked their mortgage rates to an external benchmark, usually the Reserve Bank of India repo rate. The mortgage rate of banks is set at a certain premium over the repo rate depending on the creditworthiness of the borrower and evolves in parallel with the repo rate. If the repo rate increases, your IME will also increase.

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About Raymond E. Hughes

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