RBI MPC Cuts Repo Rate: Homebuyers Advised to Ensure Income Stability Before Investing in Real Estate

RBI MPC Cuts Repo Rate: The Reserve Bank of India on April 9 officially cut the repo by a further 25 basis points in the wake of another such action earlier in February. This was pretty much a given after the RBI governor's hints of future rate cuts in the previous review. With this cuts, the central bank has reduced its rates further cumulatively for 50 bps.

But would that mean it is a good time to buy a house? The answer is not cut and dried. Lower interest rates usually mean lenders should give more attractive home loans, but there are many other aspects to consider before embarking on such a long-term monetary commitment.

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Home Loan EMIs To Reduce

A 25-basis-point cut in rates means a fall in EMIs naturally. Let us look at the effects under three cases that may illustrate this aspect.

With the same assumption, if a home loan is taken for ₹50 lakh and if the original rate is considered at 8.25%, the EMI would be ₹42,603. Now with the revised interest rates of 8%, EMI comes down to ₹41,822, meaning savings of ₹781 per month, amounting to an interest saving of ₹1,87,507 over the entire loan tenure of 20 years.

The example figure of ₹80 lakh will attract an EMI of ₹68,165 at an original rate of 8.25%, while at the revised rate of 8%, it will come down by ₹1,250 to ₹66,915, which amounts to an interest saving of ₹3,00,011.

In the case of a home loan of ₹1 crore, your EMI would have been at ₹85,207 at the old rates of 8.25% interest. With the interest rate cut to 8% now, your EMI stands at ₹83,644. That is a monthly saving of ₹1,563 and a total savings of ₹3,75,014 in interest over 20 years.

Should You Take The Plunge?

Generally speaking, lower interest rates are a positive sign. But this will not be the sole reason to buy a house.

“In the present scenario, look for stability of your income. The US is expected to go into a recession and even though we may not be in a technical recession, there could be a general slowdown and repercussions in terms of job losses. Buying a home is a long term commitment, so one needs to make a financially sound decision,” says Abhishek Kumar, Securities and Exchange Board of India (Sebi) Registered Investment Advisor (RIA) and Founder and Chief Investment Advisor, SahajMoney, a financial planning firm.

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Basic financial principles state that your home loan EMI should not exceed 30~-35% of your earning income.

A rate cut should not be the only reason to stall or avoid any purchase of a house. In the case of genuine need for a house, a buyer should have enough funds for a down payment and be comfortable paying the EMIs. However, it would be prudent to maintain some financial buffer because interest rates can change in the future, even if the current trend is toward lower rates.

“That’s why it’s important to have a long-term commitment and plan for that slight variability. The real criteria should be clarity on whether you want to buy the house now, in the place and city you are choosing, not just the home loan rates, because that’s something that will always remain variable over 15 to 20 years,” says Suresh Sadagopan, founder of Ladder7 Financial Advisories.

One must remember, however, that these RBI rate cuts usually cascade into lower home loan rates, particularly for loans tied to an external benchmark like the repo rate. Just the same, the cut may not be reflected immediately, likely occurring at the next reset of the loan's interest rate on account of banks adjusting their lending rates.

In conclusion, rejoice, but do make sure you are medically fit to the very last penny before buying a house.

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