Impact of Demonetization on Home Loan Borrowers

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Home prices, interest rates & EMI’s to come down

  • Property prices likely to drop by 20-30%
  • Home loan interest rates likely to fall by 100-150 bps; EMI’s by Rs. 85 per lakh
  • Loan eligibility to increase due to lower rates and all cheque transactions

Property prices likely to drop by 20-30%

Property has for long been considered a safe haven for parking black money in India. Crackdown on black money and demonetization of large denomination notes (Rs. 1,000 and Rs. 500) are likely to constrain further supply of black money to property markets and result in drop in property prices. This will benefit end users and make homes more affordable for them. While the actual impact on property prices may be known only over the next 3 month to a year, MyLoanCare estimates a 20-30% drop in prices as below. Extent of drop in prices may depend upon location and the type of property.

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Likely decline in property prices post demonetization

Delhi, Gurgaon,
Noida, Gujarat,
Kolkata,
Faridabad
Mumbai MMR,
Bangalore, Pune,
Hyderabad,
Chennai
Tier 2 locations
such as Jaipur,
Bhiwadi,
Navi Mumbai,
Ghaziabad,
Coimbatore,
Indore,
Bhubaneswar,
Lucknow
Type of property
Residential flats – affordable segment (Up to Rs. 50
lakhs)
10-15%5-10%10-15%
Residential flats – above Rs. 50
lakhs
15-20%10-20%15-20%
Residential property above Rs. 1 cr20-25%15-25%25-35%
Commercial units, shops25-30%15-25%25-35%
Land, Industrial units30-35%20-25%30-40%

Home loan interest rates likely to fall by 100-150 bps; EMI’s by Rs. 85 per lakh

Banks are witnessing large inflows of fresh deposits and the country’s top bank SBI itself has received over Rs. 2 lakh crores in fresh deposits post demonetization. On the other hand, the expectation of slower economic growth would mean lower demand for bank loans from both corporate and individual borrowers.

At MyLoanCare, we believe that these factors may result in 100-150 bps (or 1.0 – 1.5%) reduction in home loan rates over the next 3 – 12 months. The situation may be similar to 2004 and 2010 when easy money conditions resulted in home loan interest rates in the 7-8% range. This reduction in loan rates would benefit not only the new borrowers but also the old borrowers who have availed loans on floating rates. In case your bank or home loan company does not pass on the benefit of lower rates to you, you should consider transferring your loan to another bank.

To calculate your savings online and apply for transferring your loan, use MyLoanCare Home Loan Balance Transfer Calculator.

Impact of interest rates on home loan EMI per Rs. one lakh

EMI Based on Loan Tenure and Interest Rate
Rate 20 Years 25 Years 30 Years
9.25% 916 856 823
9.00% 900 839 805
8.75% 884 822 787
8.50% 868 805 769
8.25% 852 788 751
8.00% 836 772 734
7.75% 821 755 716
7.50% 806 739 699

Home loan eligibility to increase due to lower rates and all cheque transactions

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The typical cash component in property transactions in India is estimated at 25%. The cash component tends to be higher in land transactions and high-value properties while it is lower in the case of flats and apartments, particularly those in the affordable segment. Markets in Delhi NCR, North, and East India and in Gujarat tend to report higher cash component while markets in Mumbai, Bangalore, Chennai, Pune, and Hyderabad are less cash-intensive. Salaried customers buying self-use property tend to prefer all cheque transactions while self-employed borrowers tend to prefer paying more in cash.

We expect that the cash component in property transactions will reduce significantly post demonetization.

Home loan eligibility depends upon the EMI paying capacity of the borrower but is limited to 75-90% of property value. Banks such as SBI, Citibank, PNB and many others use the lower market value and agreement value as the property value. Other banks such as HDFC, ICICI and Axis Bank use the market value of the property as the property value. So, a home loan is not available for funding the cash component of the property. Hence a reduction in cash component and increase in cheque component will increase the overall loan eligibility, which will be beneficial to home loan borrowers, particularly end-users and first-time buyers.

To calculate your eligibility online, use MyLoanCare Home Loan Eligibility Calculator.

The overall impact for first time home buyers

Here is an illustration to help understand how the government’s demonetization move will impact home buyers and home loan buyers combining the impact of lower property prices, lower interest rates, and higher eligibility.

The overall impact of demonetization on home buyers and loan borrowers

Before DemonetizationAfter Demonetization
Property Price – Rs.7,500,0006,000,000
– Cheque Component – Rs.5,625,0006,000,000
– Cash Component – Rs.1,875,000
Home loan Rate – %9.25%8.00%
Max Loan on Cheque Component – %80%80%
Max Home Loan Eligibility – Rs.4,500,0004,800,000
Own Contribution – Rs.3,000,0001,200,000
EMI – Rs. Per Lakh loan amount for 30 years823734
Total Cost of House – Own Contribution + Principal + Interest16,327,342
13,879,452
Estimated Savings
15%

Key benefits of demonetization for home buyers and home loan borrowers:

  • Lower property prices
  • Higher loan eligibility
  • Lower rate of interest
  • Savings in the overall cost of ownership

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