Banks slashing home loan rates: Things to keep in mind before you borrow

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State Bank of India has announced a further cut in interest rates on home loans to 6.7%. SBI’s move came quick on the heels of reduction of home loan rate by Kotak Mahindra Bank, which lowered the rate to 6.5 percent barely days before that. These may not be the last bank going for some sort of ‘invitation pricing’ of loans with offers such as waiver of fees, low interest rates and better terms for non-salaried borrowers.

However, borrowers need to be careful while being lured by the offers. A sweet home loan deal should not be the sole trigger for buying. Unless all factors are considered a hurried deal may pinch later.

Rising interest rates

There are expectations of the interest rates curve turning upward. As the cycle turns and RBI starts tightening the liquidity there is a fair chance that the interest rates may climb up. Though there is a talk of the faraway rate hikes- they may not be as far as they sound. It is better to be prepared for the same. Floating rate home loans issued by banks are linked with external benchmark such as repo rate or treasury yields could change soon.

A 50 basis points hike in interest rates from 6.7% on a 20 year home loan of Rs 50 lakh inflates the EMI to Rs 39,367 from Rs 37,870 – a hike of Rs 1,497 per month.

“Borrowers need to be aware that currently home loans are quoted on a floating/variable rate basis. The rates are linked to external benchmarks such as the RBI Repo rate and Treasury Bills Lending Rates. The interest rate resets every three months in tandem with the changes in the external benchmark,” said Raj Khosla Founder and MD, MyMoneyMantra.com.

Inflation impact

Inflation pulls down the purchasing power of individuals. Put simply, you need more money to maintain your lifestyle. If you buy a large property or go for a large loan, using most of your monthly income for servicing your home loan, then you may find it difficult if the growth in your income does not catch up with inflation.

Banking on economic recovery

Governments across the world and central bankers have not left any stone unturned to revive the global economy. The Indian economy is participating in the global economic recovery. However, there are risks such as the third wave of Covid-19 and possible inflation shocks. While borrowing to buy your dream property do not forget that your income may get impacted if the economic recovery fizzles out or takes much longer than expected. Avoid borrowing too much just because the rate of interest is low now. Also enter into a deal with a lender on who offers good service.

“A home loan is a long-term relationship with the lender. Therefore, beyond the rate offered, look at the quality of customer service, proximity to the branch, digitisation of services, and terms and conditions,” said Adhil Shetty, CEO, Bankbazaar.com.

Better your existing terms

Some may have borrowed from lenders at higher rate of interest. It may be time to attempt renegotiating your home loan terms. Your existing home loan lender may not match the lowest possible rate available in the market, but may offer a good enough deal. This saves all the costs and brings down the EMI.

While refinancing the home loan, some banks offer higher than outstanding home loan on one pretext or the other – be it home improvement, home repair etc. Go for such an additional sum only if you need it.

Be prudent with your borrowings. What appears to be a cheap home loan today may not remain so tomorrow.