Experts suggest that investors willing to buy residential properties should not wait. It is better to invest at current levels.The inflation rate is ruling at quite high levels (above 11 percent) and is expected to remain high in the short to medium term. This means the rise in input costs of properties will continue and builders will be forced to raise the property prices in future.
Also, home loans attract income tax incentives for the borrowers. This means it is good to invest early in property.
However, investors should factor in some variables while going in for a home loan. As a home loan is a long term commitment from the borrower, it requires proper financial planning. Typically , a home loan tenure is 15 to 20 years.
Some factors to consider while availing a home loan:
Scheme: fixed or floating interest rate home loanFirst of all, a borrower needs to decide on whether to go in for a fixed or floating interest rate home loan. Usually, the rate of interest is 1-1 .5 percent higher in fixed interest rate options. Borrowers with stability of income can go for the floating rate option while the risk averse should opt for the fixed interest rate loans.
Plan finances:Due to the higher inflation rates ruling globally, the Reserve Bank of India (RBI) is bound to take tough monetary policy measures. As a result, interest rates might go up in the near future. Investors should factor in some interest rates hikes while calculating their equated monthly installment (EMI) outgo . Usually, banks absorb small interest rate increases by increasing the tenure of the loan. However, in case of sharp rises in interest rates (seems unlikely from current rates) investors can look for partial pre-payment and partial increase in the EMI outgo.
As a thumb rule, the EMI should not be more than 40 percent of the borrower's take-home income. Also, since a home loan EMI is a long-term issue (usually 10 years or more), investors need to plan other expenses like child's education, marriages in the family etc and adjust their outflow accordingly.
EMI:Repayment of home loans is through EMIs (equated monthly instalments).
EMIs are the fixed installments a borrower needs to pay over the tenure of the loan - to repay the debt as well as the related interest.
Usually, the EMIs remain constant over the tenure of the loan. The loan amount plus the interest for the loan tenure divided by the tenure of the loan (in months) gives you the equated monthly instalment.
The amount of EMI to be paid depends on and varies with the amount of the loan, tenure of loan, rate of interest, and mode of calculation of interest.
One of the important parameters governing the amount of EMI is the tenure of the loan. Nowadays, you can avail loans for various tenures - between five and 20 years, and in some cases upto 25 years as well.
DETERMINING TENUREHere are some factors that go into deciding the tenure of the loan:
1) Age of borrower:If you decide to borrow early, at a younger age, you can opt for a longer tenure loan - like 15 to 20 years. This way, your monthly EMI payments would be less. Although the amount of interest paid would be higher as compared to other options, you can have the benefit of availing the loan for a longer period of time.
However, if you are borrowing at the fag end of your career, you may have to opt for a shorter tenure.
2) Income of borrower:This would include the present as well as the expected future income of the borrower.
The borrower should be able to repay his EMIs without compromising drastically on his quality of living. The cash flows available after repayment of EMIs should not entail a dent in his living standards.
As such, a judicious planning of cash flows is required.
3) Tax benefits:A borrower should try to avail the maximum tax benefits available under the Income Tax Act. Presently, interest up to Rs 1.5 lakhs per annum paid for housing loans is deductible from the taxable income of the person.
The borrower should structure the housing loan amount and tenure so that his annual interest component paid in the near future is Rs 1.5 lakhs per annum. Of course this would be contingent on other factors as well, like annual income and savings potential.
TENURE AND INTEREST RATE:The longer the tenure, the higher will be the interest rate. This is due to the increased risk taken by the bank. The interest amount in absolute terms is higher , in case of longer tenures. However, the EMI is lower because the loan and interest are spread over a longer span of time.
The shorter the tenure, the lower will be the interest rate. This is because, in this case, the risk taken by the bank is reduced. The interest amount in absolute terms is lower because of the smaller tenure. However, the EMI is higher because the loan and interest are to be repaid over a lesser span of time. As the tenure of the loan increases, the interest rate also increases (to compensate for the increased risk element). Simultaneously , the EMI goes on reducing.
The last few quarters have been quite tough for the people dreaming of buying a home. The interest rates on housing loans have gone up from the 2004-05 levels. Many people thought that property prices will come down significantly due to the rise in home loan interest rates. However, contrary to expectations , property prices have never come down significantly, and in fact, have gone up in many areas.
So what affects property prices?Some factors that dictate property prices:
1) Rise in input costs:With the inflation ruling high globally (especially here), the prices of all basic commodities has increased quite significantly over the last few quarters. For example, the cost of labour, steel and cement has gone up quite significantly in the last few quarters. Due to higher input costs, builders cannot reduce property prices in their newly-launched projects .
2) Investments by foreign investors:Many foreign investors believe that there is huge potential in real estate and the returns will be quite attractive. Foreign direct investments in realty projects has increased quite significantly over the last few quarters as more foreign players are investing in real estate projects here.
-The Economic Times