If you think home loans have become dearer with housing finance majors hiking rates by 50 basis points, that's not totally true. Rates may have moved up but when one considers the tax breaks announced in the recent Budget, the net-net home loan costs are as low as 4 per cent.
The Union Budget announced this year that a home loan borrower can get total tax exemption up to Rs 100,000 on the repayment of his principle.
Earlier this amount was limited to Rs 20,000. Plus, borrowers have been given an exemption in interest outgo up to a yearly sum of Rs 150,000.
Consider Sunil Mehta, who took a home loan of Rs 20 lakh (Rs 2 million) at an interest rate of 8 per cent.
He would now pay a equated monthly instalment of Rs 24,280 for a 10-year loan. At the earlier rate of interest, prior to the hike, the EMI would have been Rs 23,760 at a floating interest rate of 7.5 per cent.
This would mean a minuscule increase of Rs 520 -- hardly much of an increase to write home about or for the finance minister to make headlines!
For every 50 basis point hike in interest rates actually results in a nominal monthly rise of about Rs 24 to Rs 26 for every Rs 100,000 loan taken.
What's more interesting is the tax savings on home loans today. Considering the maximum Rs 150,000 interest deduction on home loans, a tax assessee in the highest tax bracket, would end up saving up to Rs 50,000.
Likewise, under the new section 80L where one can repay the principle up to Rs 100,000, again taking the highest tax bracket, one would save about Rs 34,000.
Combined this means a total tax savings of Rs 84,000. Deducting this amount from the yearly EMIs, and dividing the same by the loan amount would see the effective cost of a home loan fall to as low as 3.84 per cent.
Of course, larger the loan amount, the higher would be the effective cost of the loan. "The optimum loan amount of Rs 19.4 lakh at an interest outgo of 7.75 per cent would yield the lowest possible loan cost of about 3.41 per cent," said a senior housing finance consultant.
Of course, these tax breaks come with a caveat. Those who are salaried income earners where they are eligible for a company's provident fund, would find that they would not be able to take full advantage of the tax break on the principle amount.
But an individual can pay off a greater principle amount and get tax credit for the same. Moreover, as the country is moving towards an exempt-exempt-tax system, it would do well for home loan buyers to take advantage of the latest development on the tax front.
Meanwhile, just to recap on the latest hike in home loan rates, the recent 50 basis point rise by Housing Development Finance Corporation and ICICI Bank, should be seen as a realignment with the rest of the industry. Home loan rates are now almost on a par across private and public sector players.
Unlike their private sector counterparts, public sector banks had not been as aggressive in reducing interest rates on home loans. Dena Bank for instance may be offering a low rate of 7.25 per cent for a three-year loan.
But rates on loans of 5 years and beyond are in line with HDFC and ICICI Bank post the rise in interest rates. Similarly, State Bank of India continues to be more expensive in certain loan segments even after HDFC and ICICI Bank have hiked their rates. Net-net, have rates gone up?
Hardly. They have remained more or less constant, with certain players simply realigning to the rest of the industry.
Will they go up further? After the finance minister's statement, and the fall in inflation numbers, this seems unlikely unless something drastic happens on the oil front calling for inflation numbers to move up sharply.
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