ATM :: The year ahead for home loan borrowers

BALAJI RAO | Updated: January 1, 2016 19:38 IST | The Hindu


The interest rate is most likely to keep oscillating, and prudence in investment is advocated.

By and large the year gone by has been eventful concerning interest rates on home loans. While the central bank was generous by cutting the key policy rates (the rates at which it lends to banks on short-term basis) by 125 basis points or 1.25%, the year ended with the repo rate at 6.75%, down from 8% at the beginning of the year.

The banks and HFIs too passed on the benefits after much pushing and prodding by the RBI and the borrowers enjoyed the benefit of such largesse. The rates were down from 11% to about 9.50% during the year, helping the EMI payers to retain some money in their pockets.

These rate cuts have happened importantly due to lowered inflation numbers which can be credited to steep drop in oil prices that has assisted the prices of important goods to subside, leading to inflation moderating.

The woes
What is in store for the coming year is a question that can be quite daunting when it comes to expecting if interest rates would go down further; but there is a cloud over this expectation. The below normal monsoon notwithstanding, the deluge in Chennai adding to the woes and the GST Bill not getting any favours from the opposition parties, the effect of these are going to spill over to the New Year.

The economy could be sluggish over the next few quarters and would hinge on the Budget. Unless the pending and proposed reforms get the required support from all quarters, growth would again turn out to be a mirage.

Since the interest rates are an outcome of lower inflation and growth, given the current economic and political situation we can expect the rates to be oscillating without any firm and precise direction.

One cannot rest on the comfort that interest rates would go down automatically. All that could happen in the near term is that the lending rates would settle in the range of 9- 9.50% and that seems better than 11%.

Further, the emphasis has to be on two aspects (based on the recommendations did in this column in earlier weeks):

Start investing a small amount in the name of your child who could be as young as five years or below. It could be around Rs.1,000 per month in a diversified equity mutual fund for a period of 20 years, which would turn into a sizeable corpus by the time the kid turns 22 or 25 years of age. With such a long tenure at your disposal all risks will get managed and Rs.1,000 per month is not a huge amount by any standard in the current times.

Mutual fund
Secondly, invest 10% of your home loan EMI in a diversified equity mutual fund for the same tenure of loan that you have signed up with a bank or HFI (if the EMI is Rs.25,000 for 20 years, invest Rs.2,500 per month for the same tenure). This could help you to recover your interest cost and you would have also saved on income tax.

Lower interest rates benefit borrowers. But when the same person deposits money in a bank the income generated too would be low, which can be a double-edged sword.

Hence, avoid having biased view towards asset classes, and utilise them based on the need. That is prudence.

Finally, if you are a new borrower of a housing loan, choose floating rate; it still is the ideal option.

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