Real estate has always been a steady investment that is synonymous with security and prestige and this trend would continue during these unprecedented times. Other asset classes such as equity markets, which are poised to see a downward trend over the next two years (atleast!) due to muted corporate earnings over the next several quarters, are much less reliable and extremely volatile.
With the Repo rate being reduced by 75 bps and the new base rate being 4.4%, home loan interest rates are only going to get further lower. This makes it all the more worthwhile for an investor or an end user to make a real estate investment such as buying an apartment. The inflation hedging capabilities of real estate adds to the fact that no time is better than now to ensure the 3 S’s in your investment criteria: Safety. Security and Stability!
The post pandemic world will be good for the real estate sector, the one sector that will emerge as the silver lining in such bleak scenario.
I have decided to invest in an apartment during/ immediately after the Lockdown . Should I book an under-construction / completed project?
Definitely, go for a completed project like Chowriappa Constellation! Since you have made up your mind to buy an apartment, you should consider the following, to make your decision more balanced:
1. Further delays in under-construction projects are imminent
With India under a complete lockdown and construction workers returning home, project delays are unavoidable. The real sector, especially the residential segment, has already been struggling with project delays, regulatory changes and low sales for the last few years. Given the Coronavirus pandemic, construction in incomplete projects has come to a complete standstill across the country. We foresee a delay in delivery of projects on account of supply disruption, due to the virus outbreak and liquidity crunch. This makes it all the more paramount to invest in a completed project like Chowriappa Constellation.
2. Liquidity will become an issue for Developers in completing under-construction projects.
With almost no sales happening and no foreign funds at hand, developers will struggle to pick up the pace, once the lockdown ends. The investment will start flowing in gradually and so far, the government has not announced any bailout package for the sector, which is a concerning issue
Due to volatility in liquidity, existing under construction projects will bear the brunt of these adverse effects.
Therefore, in our humble opinion, it is advised to go for an extra layer of certainty and book an apartment in a completed project.
3. Demand-supply slowdown
Demand has dried down completely and very little supply in terms of completed projects are now available due to the lockdown and its after effects. Once everything gets back to normal, it will take at least three months for real estate construction to gain pace as well as developers to resume construction work, as most of the labourers have left for their home towns.
That means supply will take a little more time to pick up than demand. This will bring an upward trend in the property prices in the post-COVID-19 world, which means you may have to pay more than what you have to pay today, for the same property. Therefore, it makes sense in buying an apartment in a completed project as soon as possible before prices go up.
Now, you have really convinced me! But I am a numbers man... Tell me more on this aspect and how the prevailing home loan rates are to my advantage… Maybe I may even think of renting the apartment out…
Home loans at prevalent interest rates allow for considerable savings while creating an asset for end-use or investment purpose. Furthermore, the borrower gets to use the savings resulting from a reduced equated monthly instalment (EMI) to avail a top-up loan, also available at lower interest rates.
The additional funds can be used for undertaking interiors related work for the apartment being purchased. Alternatively, a lower interest rate also gives borrowers an option to raise a higher amount of loan. This helps widen the choice in terms of a bigger home with better amenities and lifestyle facilities in a prominent neighbourhood like Hennur Main Road.
A back-of-the-envelope comparison of a 25-year home loan of Rs 1.5 crore at interest rates of 8.5% and 7.75% results in an equated monthly instalment of Rs 1,20,784 and Rs 1,13,299 respectively. The reduced rate of interest gives the borrower an upfront monthly savings of Rs 7,492. If need be, this money can get the borrower a top-up loan of up to Rs 9.9 lakh for enhancing the apartment’s look and feel.
By claiming tax benefits on principal and interest payments under various sections of the Income Tax Act, the borrower is able to further save Rs 9,722 every month or Rs 1,16,666 annually. The effective EMI for the borrower thus comes down to Rs 1,03,577 (including tax benefits) with an effective rate of interest at 6.74%. That’s almost 1% lower rate of interest on the home loan being availed. The overall proposition sweetens further when combined with tax benefits in the case of a joint home loan.
Interestingly, if one compares the present scenario with home loans being offered in the year 2002–03, the interest rates pretty much hovered at similar levels. In fact, lower home loan interest rates coupled with affordable prices acted as catalysts back then leading to a consistent growth in property prices across markets in the ensuing years.
Another benefit of the current home loan interest rate scenario is that a borrower can look at the possibility of going for a fixed rate over a floating one. The latter tends to get volatile and can go north based on monetary policy decisions by the Indian Central Bank.
Banks and other financial institutions typically charge a premium for home loans at fixed rates. So, this option is best availed when overall interest rates are at their lowest. The home loan borrower is able to lock the fixed-rate at a lower level and get rid of the stress arising out of the interest reset practices followed by various lending institutions.
Those looking to acquire a property for investment purposes and earning rental income have their own set of benefits. Rental yields are currently pegged at 2.5%. And with effective interest rates at 6.75%, the net effect, if a home is purchased for letting out, comes to 4.25%. This beats long term inflation figures of India hands down, thus presenting another win-win situation.
An opportunity, in the form of lowest home loan interest rates, is now available. Go ahead, make its best use and fulfill your life dream.