Should you apply for a home loan during the pandemic?

The Covid-19 pandemic has disrupted the global economy on an unprecedented scale. With the number of infections rising steadily, India is reeling under the impact too. Household incomes have been hit on account of low business activity. Would it be prudent to apply for a home loan during in this situation? 

Well, every dark cloud has a silver lining and the current situation is no different. The government and the central bank have taken several measures to mitigate the effect of the pandemic since the announcement of a nationwide lockdown in March. Besides other measures, the Reserve Bank of India cut the repo rate substantially. The reduction in repo rate has come as a blessing in disguise for potential homebuyers. 

Owning a home is a basic necessity for the majority of Indians. A large number of houses are bought through financing, mostly provided by banks and housing finance companies. Home loans are considerably different from other types of credit facilities like car loans and personal loans, primarily due to its nature of long tenure. 

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Home loans are a long-term commitment, typically lasting for over 20 years. There are two components of a home loan—the principal amount and the interest component. Even a minor cut in the interest rate can result in a significant reduction in the overall loan amount over the long run. Contrary to popular perception, home loan interest rates are not decided by individual lenders. Home loan interest rates are linked to external benchmarks. 

Earlier lenders used to peg home loan interest rates to MCLR or Marginal Cost-based Lending Rates. In October 2019, the central bank issued a circular asking lender to use new benchmarks for home loans. While the RBI provided several options, most lenders opted for the repo rate as the benchmark for home loans. The model is known as the Repo Rate Linked Lending Rate or RLLR. 

The repo rate had an indirect effect on home loan interest rates under the MCLR-based system of lending as the marginal cost of funds includes the cost of borrowing. Under the RLLR model, any change in the repo rate has a direct impact on home loan interest rates. The RBI has reduced the repo rate by 115 basis points since February. The reduction has come on the back of a 135-basis-point cut last year. The triple-digit cut in repo rate has led to a decline in home loan rates, making homeownership cheaper. So, low-interest rates coupled with depressed real estate prices have made the Covid-19 pandemic an ideal time to buy your dream home.  

(By Rishi Anand, Chief Business Officer Aadhar Housing Finance)