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Suresh Krishnamurthy

For many Indians, buying a home is an emotional decision. However, with both interest rates and inflation ruling low compared to historic levels, buying a house by taking a loan now makes financial sense too.

THE need for the security of owning one's own home is ingrained in the Indian psyche. For decades, living in one's own abode has come to symbolise an achievement — one of the goals of life.

Retiring while in the comfort of one's own house has even been characterised as a basic need. Indeed, building a home is an emotional decision for many Indians.

When many took on the burden of a home loan in the 1980s to satisfy such a need, not much thought was given to whether the decision made financial sense.

Luckily, in the 1980s, property prices ruled low and the decision to take a 15 per cent loan paid off handsomely. However, many people who took home loans in the 1990s were not so lucky. Their investment may not have delivered attractive returns.

While taking a loan to invest in a home may have delivered attractive returns in terms of the feelgood factor, the financial return would have been much less. Thus, when both interest rates and property prices ruled high in the mid-1990s, home loans made less financial sense.

The environment has changed vastly now. The twin bonanza of low interest rates and relatively lower inflation has made home loans attractive from a financial perspective too. Though it is still incumbent on the borrower to ensure that the price at which he purchases the property is reasonable and has the potential to appreciate over the long term.

It is also necessary to ensure that the borrower is not too dependent on tax savings to fund repayments. If these two conditions are satisfied, home loans can offer a lot of value to the Indian middle-class.

Higher amounts as loans: The monthly payment on a fixed rate loan of 8 per cent per annum works out to Rs 956 per month for a loan of Rs 1 lakh. If the monthly payment works out to 60 per cent of the net salary of a borrower, then the size of the loan could be as high as nearly 62 times your monthly net salary.

For the same salary, interest costs would have amounted to nearly 75 per cent of your net monthly income if the interest rate were 12 per cent.

In other words, if your net monthly income is Rs 10,000 and your spouse chips in with another Rs 5,000, you can take a loan of about Rs 9,00,000.

That, in addition, to your own funds can fetch you decent living space not too far from the city centre, except in the major cities. With savings in rent made possible because of the new house, your ability to repay would also be bolstered.

What will be the impact of inflation on ability to repay? It will be much less than it has been in the past. Suppose your salary grows at 3 per cent per annum while inflation grows at 6 per cent. Even in such an unfavourable scenario, you will have a small surplus after your monthly loan payment.

Only if the difference between inflation and salary growth is more than 3.5 per cent will the borrower be in a quandary. This, too, will be the case only if monthly payments are 60 per cent of your net monthly income now. If it is lower, your ability to repay would be even less sensitive to the vagaries of inflation.

Taxes, the only concern: From a borrower's perspective, taxes continue to be the only uncertain element.

The removal of tax benefits on loans for building or purchase hangs like a Damocles sword over the heads of borrowers.

Tax benefits on housing loans may go if the Finance Ministry accepts the recommendations made by certain committees in earlier years.

In this context, the borrower needs to be in such a position that the cancellation of tax benefits does not significantly affect his ability to repay.

This can be achieved if monthly payment does not work out to more than 40-50 per cent of the net monthly salary.

In all, if conditions such as reasonable property price, less dependence on taxes and benefits in the form of rent savings are satisfied, this is probably as appropriate time as any to take a home loan. Indeed, home loans would, then, make both emotional and financial sense.

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