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Now's The Time To Avail A Home Loan. Here's Why... - Outside View by PersonalFN
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Now's The Time To Avail A Home Loan. Here's Why...
Jun 15, 2017

Owing to the unrelenting prices in real estate so far, purchasing a house remains a far-fetched dream for most. However, a move by the Reserve Bank of India (RBI) may well put your dream house within arm's reach. If you have always dreamt of owning your own home, now's the time to go house-hunting.

The RBI made home loans cheaper by reducing the risk weight (which is the amount of capital banks have to set aside against such loans) for certain category of loans. The central bank has also reduced the standard assets provisions on individual housing loans to 0.25% from 0.4% earlier.

"Considering the importance of the housing sector and given its forward and backward linkages to the economy, it has been decided, as a countercyclical measure, to reduce the risk weight on certain categories of housing loans sanctioned on and after today. It has also been decided to reduce the standard asset provisioning rate on such loans," said the RBI Statement on Developmental and Regulatory Policies released on June 7, 2017.

This in effect will reduce your interest outgo on home loans as interest rates are likely to descend.

The RBI has increased the Loan-To-Value ratio (LTV: loan amount sanctioned to the value of the property) on loans between Rs 30 lakh and Rs 75 lakh to 80%. These loans will have a risk weight of 35%. For loans above Rs 75 lakh, the risk weight has been reduced to 50% from 75% earlier.

For loans upto Rs 30 lakh, the LTV can go up to 90%.

And for loans below Rs 30 lakh, the risk weight will be 35% for a LTV under 80%, and 50% for LTV ranging between 80%-90%.

Soon, the rates for big-ticket loans may get cheaper. A reduction in risk weights along with a higher LTV ratio for certain loan segments may encourage banks to give out more home loans while also reducing the home loan interest rate. This is expected to push growth in the housing sector that will have a multiplier effect of the broader economy.

In reaction to the move, State Bank of India is the first to have reduced interest rates on home loans above Rs 75 lakh. The Bank cut rates by 10 basis points to 8.6% and this will take effect from June 15, 2017. Salaried woman borrowers will enjoy an interest rate of 8.55%. This is the second home loan rate cut in two months by the public sector bank.

With SBI cutting rates, other banks and housing finance companies may soon follow suit. Here are the existing home loan rates of the largest lenders:

Lender < Rs 30 lakh Rs 30 lakh to Rs 75 lakh Above Rs 75 lakh
State Bank of India 8.40% 8.55%-8.65% 8.6%-8.7%
HDFC 8.4%-8.9% 8.5%-9% 8.55%-9.05%
LIC Housing Finance 8.5%-8.7% 8.5%-8.7% 8.5%-8.7%
ICICI Bank 8.4% 8.7% 8.75%
Axis Bank 8.35% 8.65% 8.70%
*Floating interest rate home loans for salaried borrowers as on June 9, 2017
(Source: PersonalFN Research)

Before you apply for a home loan, make sure you are aware of the various charges. While purchasing a house, the home loan would be able to provide approximately 80% of the agreement value of the house, the balance 20% is allocated from one's savings, investments, etc. Moreover, when the EMIs run across 15 to 30 years, it may perforate your savings plan as well your other financial goals. So, ensure you have a well-constructed financial plan in place that allocates the right resource to achieve each financial goal.

Read here: Important aspects to look into while availing of a home loan.

In India, buying a house is filled with emotions, and more so, when one is moving in with one's family, it makes it a home. Nevertheless, while you are thinking of owning your dream home, please take into account the financial and non-financial factors (individual needs and aspirations) to make a prudent and feasible choice for you and your family's wellbeing.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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