Stringent RBI policy but lower interest rate: Do you benefit from bu...

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14 MAY, 2012, 09.18AM IST, AMIT SHANBAUG,ET BUREAU

Stringent RBI policy but lower interest rate: Do you benefit from buying a house now?

Zooming interest rates and escalating property prices had forced many prospective buyers to postpone their plans of buying a house. However, the recent easing of monetary policy by the Reserve Bank of India (RBI) has brought them relief in at least one aspect-lowering of interest rates. Many public and private sector banks have announced a cut in their interest rates by 25 basis points. This means a reduction in the EMI that a borrower would have to pay. Suppose you had taken a home loan of Rs 30 lakh for 20 years at an interest rate of 11%. If the bank cuts its rates by 1%, resulting in a rate of 10%, your instalment will be slashed by Rs 2,000. While this is undoubtedly a piece of good news, the recent regulation that has been introduced in the real estate sector has the potential to dampen your soaring spirits since it could impact your eligibility as a borrower and, consequently, your home buying decision. How you benefit If the interest rates drop, your eligibility as a borrower increases marginally, depending on the percentage of reduction. Says Adhil Shetty, chief operating officer of Bankbazaar.com: "While calculating the borrowing capacity of an individual, it's typically considered that the EMI will be 40-50% of the net take-home salary. So, if there is a substantial drop in the interest rate, his eligibility goes up." This is because the borrower will be able to afford a higher EMI or be more comfortably placed to pay the same amount of EMI. However, Shetty says that most banks pass on the benefit only to new loan borrowers. "If there is a drop of 50 basis points, the average borrowing capacity of an individual goes up by Rs 60,000-70,000, which is not much. Of course, this differs from case to case, but banks consider various other factors before offering a low rate even to new borrowers," says Pankaj Maalde, head, financial planning, Apnapaisa.com. He also advises that the fall in rates shouldn't tempt you to prepay a loan. You will have to weigh whether the advantage of a lower EMI is higher than the prepayment penalty you may have to pay.

Why you will still have to pay more In December 2010, the RBI had issued a notification to banks, stating that they should not lend more than 80% of the value of the property for loans above Rs 20 lakh, and more than 90% for loans below Rs 20 lakh. Earlier, banks would typically lend 85-95% of the value of the property.

This means that you will have to pay a higher down payment now. Some banks are being more cautious and have set their own limits. According to a branch manager of Bank of India, the bank's limit for offering a loan is 75% of the value of the property. "When the interest rates were rising, there was the risk of borrowers defaulting on their mortgage payments. To reduce this risk, many public sector banks reduced the amount of loan they offered in proportion to the value of the property," says the branch manager. More recently, in February 2012, the RBI issued another stringent notification. It asked the banks to exclude stamp duty, registration charges and other levies while assessing the value of the property that they intend to finance. Earlier, banks would include such charges to allow borrowers to take bigger loans. The RBI has stated that only the basic value of the property is to be considered by banks while offering a loan. Stamp duty varies among states, but usually falls in the range of 5-12.5 % of the property value. In Maharashtra, for example, stamp duty is 5%, while in

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Stringent RBI policy but lower interest rate: Do you benefit from bu...

http://economictimes.indiatimes.com/articleshow/13109594.cms?p...

Karnataka it is 8%, and in Delhi it is 6%. Earlier, if the stamp duty was 5%, 4.25% was paid through the home loan and the buyer had to arrange only for 0.75%. Now, he will have to pay the entire 5%. Similarly, registration charge is levied at around 1% of the value of the property. Of this, 0.8-0.85% was taken care of by the home loan earlier, but now the buyer will have to pay this himself. Additional charges that are borne by the customer for purchasing the property come to nearly 1% of the property value. So, if the house you are buying is worth Rs 40 lakh, all the charges would total to Rs 3.6 lakh (considering 7% stamp duty). Earlier, your loan would have taken care of at least Rs 3 lakh, but now you will have to fund the entire amount yourself. Then there are the expenses levied by various state governments, including the value added tax (VAT) and service tax. While VAT is levied at 1% of the value of the property, service charge is levied at 2.6%. These charges too have to be paid by the customer now. Do you gain or lose? Obviously, you will have to save more to be able to pay the higher down payment, but this also means that you will take a smaller loan. Coupled with the low interest rates, it will result in lower EMIs. Alternatively, you could choose to reduce the loan tenure and become debt-free sooner. Also, the lower EMI will help you accumulate enough funds to pay for the stamp duty and other charges when you take possession of the house. Page1 of 2
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