Q: Hi Adhil. I’ve noticed most banks have drastically cut down their home loan interest rates. In such a situation, will you recommend to buy a home now with the help of a loan? – Palash
Ans: Hi there. Yes, indeed the banks have reduced their home loan interest rates to record-lows following the Reserve Bank of India’s decision to cut the repo rate on multiple occasions in the recent past. Many home loan products are now selling at sub-7 percent rates, which is historic. So, from that perspective, it’s a good time to take a home loan.
However, whether you should start a home loan at this stage or not completely depends upon your financial health. If you have in place sufficient margin funds, your income channels have not been affected by the ongoing pandemic crisis and you are getting a good deal on your preferred property, you may want to finalise your home-buying decision. But you also need to be careful about certain other things:
Firstly, ensure your margin funds, i.e. down payment, loan processing charges, GST, and all the other charges associated with buying a property, do not impact your contingency funds and insurance premiums. These are highly uncertain times and you should not compromise with other critical financial goals like building an adequate emergency fund and maintaining adequate insurance cover to buy a home. If you’re unsure, you might want to delay your home-buying plans until your finances stabilise.
Secondly, the lowest interest rates of the repo-linked home loans are often reserved for applicants with stellar credit scores. Now, some banks consider 700 while others consider 750-800 to be the benchmark of a good credit score. As such, ensure you check your credit score first before applying for a home. If it’s less than 750, you might want to first take some corrective measures to improve your score so that you enjoy the best possible rates. The risk spread determined through the loan applicant’s credit score could be up to 100 basis points depending on your lender that could result in a difference of over Rs. 14,000 per lakh of the loan taken in interest payable. Also, do note the repo-linked loans are currently only being offered by the banks and not housing finance companies.
Lastly, it might be a better idea to go for a ready-to-move-in property instead of an under-construction one as construction completion might get delayed over the ongoing lockdown.
Have a question on personal finance? Ping me on Twitter at @adhilshetty with the hashtag #AskAdhil. The writer is CEO, BankBazaar.com, an online marketplace for loans and credit cards. Need help in calculating your EMI? Use BankBazaar’s easy home loan EMI calculator.