The State Bank of India (SBI) recently raised its lending rates, taking its effective home loan rate to 10.25 %. Similarly, ICICI Bank and HDFC Bank , too, followed suit. After the latest round of rate hikes, SBI's home loan customers would pay 100 basis points (bps) over its base rate of 9.25 %; thus the effective rate becomes 10.25 %.

Realty experts are of the view that the rise in interest rate would have a compounding effect on a home buyer on a higher interest administration. "The impact of the home loan rate rise works up to Rs 50-75 per lakh of the EMI," says Amit Goenka, National Director, Capital Transactions, Knight Frank India. "This may not have any important impact for a property loan buyer in metro cities, where the ratio of ticket prices to unit sale is quite high. However, it may influence buyers of properties in tier II and III cities."

In the last two years, interest on home loans has gone up by at least 200 basis points (100 basis points equals 1 %), from about 8 % to above 10 %. A quick back-of-the envelope calculation shows that home loan rates have increased by about 25 %.

Similarly, developers, too, observe that the present hike in interest rates is more of a "cyclic turn of events" that shouldn't be viewed as a cause of much concern. Mayur Shah, Managing Director, Marathon Group, "Perhaps , if the inflation is tamed, there are chances that the rise in interest rates are likely to come down. In the last 10 years from 2000 to 2010, the interest rate on home loans has shuttled between 8-12 %. So, for any new home buyers, I would suggest to calculate EMIs keeping in mind a 1 % rise in interest rate. Also, a new home loan seeker should avoid opting for a maximum loan amount offered by a bank or any financial institution. Instead, they must look forward to a maximum of personal funding ." However, for a home buyer opting for a loan less than Rs 50 lakh, a slight rise in interest rate shouldn't be a matter to worry about, he adds.

"Most home loans offered are on a floating rate basis, so the increase in home loan rates witnessed now would also ease down as the inflationary trend reverses," avers Manoj John, Vice-President , Corporate Planning and Strategy, RNA Corp. "Hence , the current increase in EMI will be followed by a pattern of decrease in months to come, and supports the reason to buy into a property that meets the buyer requirement. By delaying the purchase decision the customer also runs a risk of having to buy the same property at a higher price, if today the same is available at a good value proposition."

What type of a loan option augurs well for a home buyer considering the present scenario? "In the rising interest rate scenario it is better for a person to avail a fixed rate home, or a loan with interest lock-in period for the first three years. As in the long term the interest rates are likely to come down," says Jayant Gehi, Assistant Vice-President , Business Development and Sales, Supreme Universal.

In addition to this, a home buyer should always speak to at least three to four different housing finance institutions and understand their products and compare them to decide what best suits their needs, says Gehi. "They should especially look at lockin clauses, exit penalties, process fees apart from the interest rate in the home loan. For example, if they are expecting some funds in the near future and would like to reduce their loan amount they should ensure that their loan does not have a pre-payment penalty so that they can pay back such amount and reduce the interest burden," he adds.

According to Naveen Soni, Assistant Vice-President , Ackruti City Ltd , a home buyer should choose a home loan after taking into account all the hidden costs such as legal charges, pre-payment charges or payment penalty. "Apart from this, a buyer must take into account that the property is valuated properly. There is a valuation fee levied by the bank in case if it's not done so. Additionally , a buyer can negotiate on processing fees," he adds.

Generally, the tenure of mortgage is for a period of 15-20 years. However, in some cases, such hikes could well have taken the tenure of home loans to beyond 20 years. This in turn raises the possibility of banks and HFCs now asking some customers to part pay the principal amount of home loans. "In the longrun , a home buyer can look into increasing the term of EMIs after taking into account their disposable income ," says Soni.

Overall, while the investors' market would remain unaffected, the market of home buyers will be marginally affected by the present rise in home loan rate. "Realty remains the safest place to hedge compared to commodity investment in gold or silver as it surely fetches high returns in the form of rent, thus proving to be a real asset ," says Shah.

Source: [ET]