Home Loan – Should buyers go for it now?

Non-food credit grew 11.3 per cent – its lowest figure in the last 12 years, for the period ending on Oct 09, 2009. Home loan, a part of non-food credit did not report very healthy credit off-take too. Nevertheless, the festive offers made by different PSU banks along with reduced interest rates offered by private counterparts revived the home loan disbursals. Various banks offered the ‘8 per cent-first year offer’. This along with reduced property rates aroused the buyers’ appetite to buy homes.
While the market think tanks called these festive rates as teaser rates, similar to the rates offered in western countries which created asset bubble, the central government along with PSU banks offered these special rates for a limited period to revive the realty market on which many builders were dependent or on the verge of collapse.
Initially, in the first two quarters of FY 2010, home loan disbursals were on the track but following the increase in property prices by 10-30% in the last 6 months, consumers have started postponing the buying as they are apprehensive of a possible market correction.

Offerings by PSUs and Private banks
Almost all the PSU banks have come out with special home loan offer where the first year interest rate is pegged at 8 per cent followed by 8-9 per cent rates for next 4 years. Subsequently, the rates would be benchmarked against the said BPLR. They have also offered ‘nil’ processing charges during the festive period along with ‘nil’ prepayment penalty unlike in private banks where they still charge processing fees and prepayment penalties along with higher interest rates.
So, currently PSU banks offer better deals in terms of total incentives albeit they take higher processing time..

Fixed or Floating?
In the market scenario, it is better to blend the fixed with floating. Following the outlook in the 2nd quarter 2009-10, the RBI has indicated to unwind the expansionary monetary policies in near term; so, interest rates may go up in FY 2011. So, it is recommended for the current buyers to lock in the fixed rates to get the early benefits from a possible rise in interest rates.

Time to buy
Moreover, RBI has also asked the provisioning requirement for real estate loans which will also push the cost of the property as builders will pass the cost to consumers. But it won’t be easy to pass the additional cost to buyers as the property markets are already flooded with substantial supply while demand has not evolved. So, the buyers looking for a property should go for it.

Down-payment requirement
In the current calendar year, many banks have reduced the margin requirements for home loan borrowers from 25% to 15-20% of the total property prices. So, it is a further push and an incentive to home buyers.

What percentage of your net income you can have your EMI?
Generally banks offer loan with an EMI in the range of 35%-65% of total monthly income. It also depends upon the credit history of the individuals. So, one can expect an EMI at a moderate level of 50 per cent of total monthly salary.

What should customers do?
The improved economic conditions have already pushed the property rates by 10-30%; so it would be prudent to take the buying decision in the current period as regulatory caps would push up the prices further. Moreover, the festive rates are valid will Dec 31, 2009 after which the normal rates would apply and there won’t be any additional incentives available.