Should you take a home loan now or wait for interest rates to fall?

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Should you take a home loan now or wait for interest rates to fall?
Buying a home is a long term commitment where you create an asset. Taking a home loan for buying your home saves tax. However, you should keep few things in mind like the loan amount, bank, interest rates, interest options, tenure of the loan, EMIs before you apply for a home loan.

Its better if you choose a home that you can afford to buy. The home loan ideally should be 30% of your salary so that you can spend as well as save some money apart from paying the EMIs. You should also decide the tenure for which you are applying the loan. Choosing a shorter tenure say 15 years instead of 30 years would let you pay off the loan in half the time saving your interest payment for the rest 15 years. However, you have to pay higher EMIs if you choose shorter tenure.

Which Interest rate to choose?

There are two kinds of interest rates - Fixed interest rate and floating interest rate. In fixed interest rates, the rate of interest is fixed for a given period of time and does not change with market fluctuations. Suppose, you opt for a fixed interest rate of 10.25% for eleven years then you have to pay EMIs at 10.25% for eleven consecutive years irrespective of market changes.

Whereas, in floating interest the interest rates changes or varies with rest of the market. You should choose your bank that gives loan at a lower rate.

Generally, it is advisable to prefer floating interest rates as the free interest rate are usually 1-2% higher than floating interest rates. Moreover, the rates become costlier when there are cuts in interest rate in the market. However, fixed interest rate are safer if market rates become higher.

Will the home loan interest go down?

With the current CPI inflation rate at 8.5% as of April 2014 (yearly basis), prices of goods and commodities has increased many-fold. Fuel prices increased pushing up the prices of other household items.

In addition, bad monsoon this year is likely to hit the already high food prices. In this situation, it is highly unlikely that Reserve Bank will cut rates and so loan interest rates are predicted to remain flatter this year.

Also, in 2013 bank deposits surpassed the credit growth, major contributor being the Foreign Currency Non Resident (FCNR) deposits. Bank deposits jumped 15.9% annually as of December 27, 2013 while credit growth remained at 14.5% for the same period. So the banks have excess liquidity and there is a possibility that interest rates may remain where they are.

New Finance Minister, Arun Jaitley has pledged to control inflation, restore economic growth while keeping the fiscal deficit at a lower level. He said he will focus on inflation as well as economic growth maintaining a balance between the two.

Clearly, if he is able to control inflation, the RBI may cut interest rates going forward, which would mean that you could wait before taking a home loan.

Read more about: tax, bank, salary, inflation, balance, growth, economy, fiscal
Story first published: Tuesday, May 27, 2014, 14:29 [IST]
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