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Impact of Repo Rate Hike on the Realty Sector

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Rachit Chawla, Founder & CEO, Finway CapitalThe Reserve Bank of India (RBI’s) decision to hike the repo rate by 0.25 basis points again within a time span of two months has cast a negative spree over the whole realty sector. This resulted in financial institutions hiking the home loan EMI’s thereby making the dream of owning a home dearer to the buyers. Unfortunately, along with the buyers, the potential increase in interest rates will severely hit the interests of builders and other real estate players, too. Most of the real estate experts suggest that this would lead to housing sales velocity hitting a new low and a delayed patch of revival for the already sluggish sector which was previously disrupted hard by the implementation of demonetization and GST in the nation. However, the time for the industry players is not to stand still and weep but to take the situation boldly and dedicatedly work towards delivering lucrative deals on the table to bring back the serious end-user demand in the market which isn’t deterred even by the marginal now-and-then hikes.

Monetary Policy

Even though the customers and the builders are complaining against such a prompt rise in repo rate by RBI, there are justifiable reasons for the RBI to continue with their contractionary monetary policy. From 2011 until 2018, Consumer Price Index (CPI) in India averaged to the 116.25 index point’s mark, with an all-time high of 138.60 index points in June 2018 and a record low of 86.81 index points in February 2011. Wholesale Price Index (WPI) in India also spiked up by 5.77 per cent as compared to the year-on-year basis in June of 2018. The wholesale inflation bandwidth in the aforementioned time duration is said to be the highest ever since March 2017, after a 4.43 per cent gain in the prior month and above market estimates of 4.93 per cent. The hefty rise in prices was mainly due to food and fuel inflation, but apart from that other core category like housing, clothing, education, etc. also led to the rise due to higher private consumption expenditure.

The fuel prices have shown some fluctuations, but still remained above the Rs.70 mark which is projected to stay the same or even go up higher by the experts due to geological, international markets and global political scenarios. Mainly the crude oil price hike was triggered on May 8, 2018, with US President Donald Trump withdrawing their nuclear deal with Iran.Moreover, Venezuela’s economic and political instability and the recent deterioration in oil supplies have led to the increase in oil price. As India imports significantly from Iran and Venezuela, the developments affect the oil prices and import bill of the country. Overall, the continuation of rate hike pattern is to control the imbalance in the economy caused by the inflation and its severely agitated determinants.
Prudent Realty Decisions are the necessity of time

While the repo rate hike might have deterred the customers from dreaming the home of their own, but the condition doesn’t seem to be improving until 2022 and delaying the idea of realty investments will do no good for them. Better than delaying, it’s advised to indulge in a detailed market research, closely work on cutting the investment costs, and make them favourable to your realty needs as much as possible. Although it seems to be tough, a prudent decision taken on- time will reap many great benefits from the investments once made in the real estates. Here are some precautionary measures to be careful about while opting for a home loan from the market:

1. Eligibility Criterion: The loan amount to be sanctioned is derived from the customer’s current income and previous track records of loans and credit card dues. Generally, the financial institutions provide 80 per cent of the value of the property as the loan amount, subject to your income. But the income criterion at times doesn’t involve some of the salary slip heads while calculating the net monthly income of the borrowers, only the income heads that can be utilized to repay the loan are considered. This is the reason why the borrowers generally witness a difference in the eligibility amount as quoted on the website and as realized once the application gets processed.

2. CIBIL Score favorability: Another important factor that will highly influence the loan decisions is the individual’s creditworthiness as provided by Credit Information Bureau (India) Limited (CIBIL) provides a credit score on a scale of 300 to 900 based on your previous loaning, borrowing and credit activities. It is inclusive of all the transactions related to the individuals like credit card usage, how the bank accounts are managed, check bounces (if any), existing loans, loan repayments, credit card and loan applications and many more. A score above the 700 mark is more likely to get a home loan, but one has to be careful while applying for the loan as the more times one applies for the same loan in varied places, CIBIL considers it as credit hungry situation and minimizes the chances of getting a loan.

3. Interest types: Before finalizing a loan, the borrowers need to be sure about the interest rates they are opting for as the interest rate type one chooses highly impacts the monthly EMIs which he has to pay. If one goes for the fixed rate home loan, then the EMIs won’t vary over the loan tenure but in the floating interest rates, the rate fluctuates and is determined on the basis of prevailing base rates plus a floating rate. Fixed rates should be preferred when the interest rates are expected to rise in the future and in case of interest rate fall predictions, it is better to go with the floating ones.

4. Loan Tenure: The EMI calculations involve three main headers of the loan—amount, interest rate and the loan tenure. In case of loan tenure, the EMIs are inversely proportional to them, i.e., the longer the tenure gets the lower the EMI falls and the shorter the tenure gets, and more rise is witnessed in the EMIs. But in case of total interest paid, the loan tenure shares a directly proportional relation with it, i.e., the higher the tenure, the higher the total interest paid, and vice-versa. Hence, it is advised to carefully assess the impact of EMI payments on the monthly finances before making the final decision about the loan tenure.

5. Documentation: This is the last but the crucial step of the home-loan procedure. It is only in this stage where many while running ahead in a hurry end up in excessively messing things up and then regretting all the time. Make sure to check and recheck the documents carefully and get a clear idea about each and every clause. If one faces difficulties in getting through the documents, one can take assistance from financial advisors. Industry experts & advisors not only help one in zeroing every minute detail of the documents but also recommend him the best loan choice as per his financial situations & responsibilities.