State Bank of India (SBI), the country’s largest lender, recently cut its lending rates linked to the central bank’s repo rate by 25 basis points (bps), lowering borrowing costs for homebuyers.
Most experts are of the opinion that SBI’s decision to cut home loan rates could encourage other banks to follow suit. It would also ensure that a large number of buyers who had applied for home loans earlier but were rejected on eligibility grounds, may now just make the cut due to the reduced rate.
Others say that an interest rate cut may be just one reason for buyers to go in for a property purchase but not the main reason. There are a range of factors that prospective buyers may want to consider before taking the plunge, such as job security, builder reputation, discounts offered by builders, GST rates not to mention the preference for ready-to-move-in apartment over an under construction one.
The recent rate cut by SBI makes home loans even more attractive to existing customers as well as new buyers. A 25 basis points decrease on a loan can mean substantial savings. For instance, a loan of Rs 40 lakh for 20 years at a rate of 8.45% accrues an interest payable of Rs 43 lakh. A 25 basis points reduction brings down the interest payable to Rs 41.5 lakh. This means savings of Rs 1.5 lakh. For new customers, this brings down the monthly EMI from approximately Rs 34,600 to Rs 34,000, a reduction of almost Rs 600 per month.
“We are seeing number of factors coming together, which makes investing in property a good idea. Apart from the low interest rates, other measures such as the RERA legislation, Credit Linked Subsidy Schemes such as PMAY, the increase in supply in the affordable housing segment, all put together make investing in property more reliable and rewarding. With a good number of unsold properties available, builders themselves are trying out several ways of attracting customers. So, it is a good time to invest in property,” said Adhil Shetty, CEO, Bankbazaar.
Ashish R Puravankara, MD, Puravankara Limited, said SBI’s move was the need of the hour.
“The decline in interest rates, from SBI is a welcome move. The rate cut is not only a relief to homebuyers, but it proved to be beneficial for the entire sector. It will also infuse a positive sentiment in the residential segment and act as a confidence booster for many potential homebuyers. Such initiatives will revitalize the entire realty ecosystem… we also hope that this move will start a trend which will be followed by other lending institutions, further widening the web of benefits for the homebuyers across the country, eventually pushing the overall demand for homes,” said Ashish R Puravankara, MD, Puravankara Limited.
SBI’s decision to reduce the home loan interest rate is expected to have a direct bearing on homebuyers who were unable to take a home loan earlier due to eligibility issues.
“These fence sitters, as many as 2% to 3%, will now be able to make the cut. The first few months after the announcement would see a 5% to 6% percent increase in those applying for a home loan. The demand and supply equation would play out only after the first three months,” said Rishi Mehra, CEO, Wishfin.
It is almost after a decade that the interest rate being offered is in the sub 8% range. This would even be lucrative for those who are staying on rent.
“Those paying a rent of around Rs 12,000 per month may now find it more viable to pay an EMI of around Rs 18,000 per month and build an asset in the process,” he said.
The reduction in interest rates over the last one year by almost 135 bps is what has made housing affordable and that is the reason behind the increase in home sales in the last few months, said Pankaj Kapoor, founder and managing director, Liases Foras.
“There have been issues such as economic slowdown, GST and regulatory roadblocks that have created hurdles and not made reduction in home loan rates as effective. But now with property prices having come down by almost 6% to 7% plus interest rate, not to mention builder discounts, affordability is bound to improve,” he said.
Having said that, interest rate is just one of the motivators and not the only reason for people to plunge into a property purchase. Buyers would first want to ensure that their jobs are secure before going in for a long term liability such as a home loan. Other factors that they may consider include builder reputation which makes it safer to purchase a ready-to-move in property rather than an under construction one, he says.
Also, more initiatives must be taken to improve housing demand, The Budget should introduce more tax reforms, perhaps offer full interest rate exemption to first time homebuyers to stimulate property sales and offer more sops for the under construction segment, he added.