How Can Home Loan Borrowers Make The Most Of A Low Interest Rate Regime

After the banking regulator brought repo rates to record low levels in June this year after effecting three reductions in a row, banks have begun to announce reduction in home loan rates for customers. Among the many banks that have reduced their loan rates are public lenders such as State Bank of India (SBI) (8.40 per cent) , Punjab National Bank (8.40 per cent) and Central Bank of India (8.50 per cent) . Private lender ICICI Bank has also lowered its marginal cost of funds-based lending rates (MCLR) to bring it to 8.65 per cent. 

Also read: Home loan to get cheaper as banks lower rates

Buyers looking for an affordable property would find it especially profitable now to make a purchase since the government has increased the tax deduction limit on the interest component to Rs 3.5 lakhs in the Union Budget 2019-20 from the earlier Rs 2 lakhs. The deduction is available only if the property value is up to Rs 45 lakhs, and the loan is availed by March 31, 2020.

While this combination does provide a buyer a great opportunity to apply for home loans to buy a home, care must still be taken to make sure that what is profitable now remains the same in the future, too. 

When rates touch a record low, chances are they would move upwards in the times to come because of the simple economic reason – when interest rates depreciate, savers move their money in different assets. This results in a liquidity crunch situation for the banking regulator; there is too much money out in the market while there is too little lying within the banks. Such a situation, if it prevails for a long time, would cause inflation rates to rise, consequently increasing the cost of goods, forcing the RBI to increase rates.

In such a scenario, financial institutions would exercise extreme caution while lending money at a time when consumers are likely to apply for home loan in large numbers to take advantage of a low interest rate regime. This means borrowers whose credit scores are poor, have a thin chance of getting a home loan. In such a situation, the borrower also has little scope for bargaining. Since rates are already low, banks would stop offering the waivers/discounts they might otherwise, including processing fee waiver, etc.

To make the best of the current low interest rates, here's what you can do:

Opt for a fixed rate of interest:  If we already know that the chances of interest rates going down further are slim, it would be a financially wise idea to pick the home loan on a fixed rate of interest rather than on floating rates. It begs mention here though that even fixed rates are not 'fixed' for the entire loan tenure. The money-market clause in your home loan agreement, gives lenders an unfettered right to make changes. Also, fixed-rate loans are invariably costlier than floating rate loans.

Try to use your savings to pre-pay: Since interest rates are low, it hardly makes any sense to keep your money in fixed or recurring deposits. Our savings must be used to pre-pay the home loan, ideally before market conditions force the lender to make use of the money-market clause and increase rates.

Find alternatives for tax saving: Home loans are one of the many instruments that help taxpayers save money. Based on the assumption that servicing a longer tenure loan helps you claim tax deductions, is one way of looking at it. A financially prudent tax payer is one who uses all his options to maximise his benefits. Look for alternative investment strategies which would help you save taxes once your home loan is fully paid.