Should you buy your first home now or wait for lower interest rates?

Should interest rates determine your house purchase decision?

Buying a new home is always auspicious, the home buying decision is even more salient when it comes to purchasing your first home. With the ever evolving credit market, home buying is getting easier in terms of securing capital as the real estate market is operating with abundant support from housing financiers, banks and non-banking finance companies (NBFCs).

As a home loan borrower, you should always act prudently while securing the long-term credit. A hurried decision can critically jeopardise your finances in the long run as the home loan repayment period can stretch up to 30 years.

Also read: Why pre-paying your housing loans early makes good financial sense

Home buying conundrum? Now or later

Securing the first real estate asset for residential purposes is one of the best decisions of your life as you will be free from rental obligations and unwarranted shifting of homes. Getting hold of an appreciating asset is one of the paramount advantages of buying a home.

With plentiful offers from different market players in the housing market, you can get home loan offers at much more flexible terms as compared to any other credit facility. Before deciding between home loan offers, you should prepare yourself for the expenses that are not covered under the home loan.

Furthermore, the current interest rate scenario should not affect your home buying decisions if you are considering purchasing the first house. The earlier you decide, the better it will be for your stability and finances.

A 50-basis-point uptick in the home loan interest rates becomes less significant as most home loans are floating-rate loans, which means that the benefit of an interest rate cut is passed on to the customers as soon as possible or as per the interest rate reset cycles of your home loan financier.

Given the trajectory of India’s credit ecosystem and growth rate, there is a likelihood of repo rates going south in the longer term. Even if home loan interest rates continue to hover around 8.5 percent, the end benefit of owning a piece of property under your name is very compelling.

When should you buy your first home?

It is always the right time to buy your first home for residential purposes. The only differentiating factor is the availability of funds. If you are qualified for a relatively lower home loan, then you can look at buying a smaller house rather than stretching your budget to accommodate a bigger one, going beyond your means. Securing a home loan and repaying it well within the due dates effectively improves your credit mix and indicative credit score.

Over and above the home loan financing, you should make sure that other factors are working favourably with your house purchase decision. These include your frequency of changing cities, professional commitments of travelling abroad, marital status etc.

Also read: Banks yet to fully pass on RBI rate hikes to customers, shows data

Financial factors you should consider before purchasing a new home

Funds for downpayment

Securing the requisite down payment should be the priority before going ahead in the home loan market. For instance, if you are considering buying a residential property for around Rs 2 crore, you will be obligated to pay at least Rs 50 lakh as downpayment. Banks and housing financiers operate well within the framework laid by the Reserve Bank of India (RBI) under which lenders are allowed to finance a maximum of up to 75 percent of the home value for home loans over Rs 75 lakh.

Stamp duty and registration charges

The other upfront components are the stamp duty and registration charges that constitute nearly 6 percent and 1 percent of the value of a home, respectively. For a house worth Rs 2 crore, the registration charges stand at Rs 2 lakh and stamp duty comes in at Rs 12 lakh. Collectively, you need to secure at least Rs 64 lakh to purchase a house worth Rs 2 crore.

Existing liabilities

You should always be wary of the ongoing liabilities, both short term and long term. If 50 percent of your net income is being consumed to accommodate monthly repayments, then you should postpone the home purchase decision until the time 80-90 percent of your income is free from debt obligations. A cautious delay in the home purchase can also help in securing higher home loan amounts at cheaper rates as financiers carefully examine the debt-to-income ratio before extending a long-term credit like a home loan.

Credit score

Credit score remains one of the most important factors to consider before availing of credit, be it secured or unsecured. The credit profile of a customer becomes a primary filter as it showcases the credit mix, the repayment behaviour of an individual and the ability to handle various forms of credit. You should always wait and improve your credit score in case it contains recent red flags or is below the prime range.

To wait or not for lower interest rates

Even if you wait for a while for interest rates to cool down, you might stand to lose in absolute terms as the value of real estate can go north. The price appreciation in the value of the home will fully counterbalance the savings you are supposedly looking to obtain at cheaper interest rates.

With interest rates currently prevailing at 8.5 percent, the equated monthly instalment (EMI) for a Rs 2-crore home loan with a 20-year repayment tenure will amount to Rs 1.74 lakh.

Assuming you wait for about a year or 18 months, the interest could witness a 50-bps cut. And, in the meantime, the value of the house will appreciate in line with the last recorded property inflation of 5.9 percent per annum, as per Knight Frank Global House Price Index.

As a result, the value of the Rs 2-crore worth home could increase to Rs 2.12 crore. So, let’s say the banks pass on the net benefit of a 50-bps cut in repo rates to the customers and the home loan interest rate shrinks to 8 percent. Now, the EMI for a Rs 2.12-crore loan will escalate to Rs 1.77 lakh and the net interest payment will jump to Rs 2.14 crore.

Therefore, there is no benefit as you’ll end up paying a higher EMI after waiting for a year for the interest rates to come down.