Gone is the era of remarkably low interest rates on homeland commercial loans, with the Reserve Bank of India raising the repo rate 5 times since May in the year to a total of 2.25%. It is possible that this may not be the end of the rate hike cycle, as there could be a few more hikes in the coming years. Rising interest rates are having the biggest impact on domestic applicants, as these are the loans with the longest terms and therefore potentially the largest loan a person will take in their entire life.
According to Amit Gupta, MD, SAG Infotech, household bills, such as loan EMI (Equated Monthly Installment) or rent, can potentially throw your cashflow out of balance. While your overall loan EMI should not exceed 45-50% of your gross income, your home obligations should not exceed 35-40% of your gross income. Analyzing 9-9.5% on loan vs 12-15% on investment may seem like an obvious choice but the psychology of being burdened with your position makes the borrower uncomfortable. Prepaying is a better option. Because the interest component is larger in the initial years and gives tax benefits, effectively paying the advance after 5-7 years. Managing a fixed expense like EMI, especially when it is huge, can be difficult in today’s unpredictable work environment.
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“Rental rates are quite an interesting thing to study. It is not easy to answer whether the rental rates can cover the entire cost of your home loan EMI or not. Suffice it to say that most new properties will cost you a substantial portion will help, perhaps more than two-thirds of the EMI. However, with the increase in the repo rate, rental rates are also expected to increase. But, it is very important to look at the trade-offs that need to be made. We believe that Choosing and investing in the right properties will increase your chance of achieving this. Additionally, positive consumer sentiment is also set to drive new heights in the real estate sector, which may make this concept possible”, Vishal Raheja, MD, InvestoXpert.com said.
Real estate used to be limited to residential outskirts, but proptech, booming economy and revolution have changed the equation. Now, commercial real estate is at the forefront with many possibilities for its owners. Banking institutions charge higher interest rates for commercial real estate loans. Depending on the lender, this rate can range from 9-15% per annum. Lease Rental Discounting is a loan secured by the rental receipts of your pre-leased commercial property. The loan EMI is reimbursed by the tenants through the rental income of the commercial space, so you need not pay them. LRDs can be used to expand business, acquire personal or business properties, or engage in commercial/residential real estate. No money is taken out of your personal income; Instead, the EMI is deducted from the rental income, which acts as collateral for the loan,” said Nakul Mathur, MD, Avantha India.
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Rental prices range from 4% to 6% of the property’s valuation. In most parts of India, your rental income will not cover more than 40% to 60% of your EMI. As a result, you will have to pay a part of your EMI from sources other than your rental income. Please note that the EMI will range between 10% to 12% of the loan amount per annum. In addition, you will need to set aside around 20% of the total cost of the property as margin money.
So, the concept is great, but in practice, due to high property rates and low rental yields, it just isn’t happening in India, despite all the apparent slowdown in the real estate market being discussed.