“Suppose home loan EMI goes up and makes it difficult to manage our monthly expenses. Shouldn’t we be cautious?” Sourabh looked at his wife with questioning eyes.
Sourabh and his wife Ruchi have been considering buying their home in Kolkata for quite some time but have delayed the decision for over a year.
They are early in their careers and they were worried that any wrong move might set them back financially.
But is there a valid reason for their concern? Or are they overthinking a simple home purchase?
We will understand in greater detail but before that, let’s know their situation in some detail.
Young Couple in a Big City
Kolkata is not the hometown of Sourabh and neither is Ruchi’s. They grew up in Durgapur and came to Kolkata to study at Jadavpur University.
After the course, they got jobs in TCS and Cognizant in Kolkata.
They got married and started living in a rented apartment in New Town and have been considering buying their own home to really settle down.
But they are cautious about making an injudicious decision.
After all, they are immigrants in a big city.
There is always a fear of weak finances as they are not financially very solid yet.
But why are they so fearful?
They are a working couple and have no child yet. No dependents till now.
Although they are planning a family. It’s been 3 years since they got married.
Still, they are worried about the rising cost of living.
Sourabh is apprehensive about the rising home loan EMIs.
He is in favour of waiting a bit hoping interest rates will come down. But Ruchi wants to take the plunge.
She wishes to be a mother in a new home as soon as possible.
Buying an Apartment with a Home Loan
Taking a home loan is the easiest way to buy a home.
Several options are available for consideration nowadays. You can even contact NK Assist from the house of NK Realtors for a professional consultation based on your requirements.
In the case of Sourabh and Ruchi, the approved loan amount can be higher if they jointly own the property and club their incomes.
It is usually a good practice to do that as both the applicant and co-applicant will be eligible for income-tax benefits against the housing loan.
Nowadays, the down payment can be as low as 10% of the total consideration. There are also various ways to make it easy on your finances.
However, Sourabh is somewhat concerned about the EMI they would have to pay in the future.
What if the EMI increases substantially and becomes a strain on their monthly finances?
We will examine whether Sourabh’s fears are valid but before that let us understand the dynamics of the interest rate.
Inflation and Interest Rates
Interest rates are fixed by the central bank in every country and RBI does that in India.
However, certain factors influence its decision.
It basically depends on the demand-supply balance in the economy, although other extraneous factors are also important.
Let’s dive a little deeper.
When there is enough supply to cater to the economic demand, prices of goods and services come down.
In such a scenario, interest rates come down. Low interest rates help to further raise demand and consequently, production of goods and services also increases.
Eventually, supply outstrips demand. Interest rates are at their lowest during this time.
A period of easy interest rates generally leads to lower demand and higher supply.
It is typically a situation when producers are not adequately compensated and supply starts to come down. This results in the prices going up.
As you know, this condition increases inflation in the economy.
A few years ago, we had low inflation but currently, inflation is elevated. High interest rates make it difficult for the common people.
RBI hikes interest rates in such an environment to suck out some money from the economy as this helps cool off inflation.
So, it depends on inflation but RBI does not increase interest rates too much as that will hurt the economy.
However, home loans are long-term financial instruments, and as interest rates are cyclical, over a long period they average out.
Let’s see how that happens.
Long-Term Interest Rate in India
Inflation is presently elevated in all major economies of the world and India is no exception.
But there is a piece of good news.
There is no runaway inflation.
Moreover, it seems that the prices are stable now. Generally, food prices in the winter season are rather low.
Raw material prices have come down significantly recently. Steel and cement prices have stabilized.
The Reserve Bank of India (RBI) has maintained its inflation projection at 5.4% for 2023–2024.
Although inflation currently is within RBI’s comfort zone of 2-6%, it prefers an inflation of about 4%.
Inflation is cyclical in all economies despite excellent monetary management by RBI.
It so happens that 3-4 years of a low-interest environment is followed by a few years of a higher interest rate regime.
How does it affect a home loan borrower of 20 or 25 years tenure?
Not much, as the high and low interest rates even out, and the borrower enjoys an average interest rate over the home loan tenure. Even if he borrows during a high-interest rate period, he will surely see his EMIs come down after a few years in a low-interest rate period.
They Took a Decision
After due consideration, Sourabh and Ruchi decided to buy their first home in New Town, Kolkata.
They are hoping that interest rates will come down soon and their EMI will also be reduced.
If you want to know the benefits of buying an apartment now, contact us.
