Home Loan: High Low Interest Rates High Low Property Prices Best Time To Take a Home Loan

Very often, I come across people asking this question - "When should a home loan be taken?" Should it be when the interest rates are high or should it be when the home loan interest rates are low? What is a low interest rate range? What is the right time to take a home loan?
In this article, I will explain the Mathematics and scenarios about house or property prices with respect to low and high interest rates for home loans

Home Interest Rates & House Property Prices: Best time to buy

If you are reading this article, that indicates you are seriously considering purchasing a house on loan. The big questions facing you is - are the current rates quoted by the builder right at this time? Are the home loan interest rates correct for taking home loan? is this the right time to get into this transaction of buying home on loan or should you wait for some more time?
Let's see -
Section 1: Please understand clearly that when you buy a house on home loan, there are 2 components of it:
1) The Fixed Price Component - this is the amount that you pay to the builder. Remember that a part of this comes from you savings, a part from the home loan. This fixed component depends upon the property rate (per sq. ft. cost) and is a determinent of one time cost. i.e. once you pay the total amount to the builder and get the possession of the flat, you dont need to worry about this.

2) The variable component - this is the component that keeps changing i.e. since you've taken a home loan, and it is 99% that you have taken it on floating interest rates, it is quite possible that the interest rates will keep on changing (or better to say that they will keep on increasing). Hence, this introduces a variable component in your house purchase transaction and this is a repeated recurring cost.

Related: Home Loan Tax Benefits and All Home Loan Articles

Now, coming back to our question on what is the right time to buy a house on loan?
Section 2:
1) Please note that usually, when the home loan interest rates are high, the property prices will be a bit low because there will be less demand. Hence, builders will be willing to negotiate and bring down the prices.
2) The reverse happens when the home loan interest rates are low. Generally, builders will increase the cost of property to astronomical levels, buyers will not mind paying that high price since the loan are available for cheap leading to low EMI payments.

So, what can be done to determine the right time to buy a house? Club both the things discussed in Section 1 and 2 together. The fixed price component is something which you have to pay one time. It's better to keep it low. And it will be low when the first scenario of high interest rates will occur i.e. high interest rates means less money with people, high cost of loan, so less borrowers hence less demand and thereby a decline in property prices leading to less fixed cost.
How is this beneficial?
First, you pay less fixed cost. The drawback is that you take home loan at higher interest rates. But it still works in your favour. Since you are taking a higher interest loan, your initial EMI payments will be higher. When the economic cycle turns around in 2-3 years time, the interest rates will start coming down. Hence, you can expect you EMI payments to come down.
It is quite possible that in countries like India you may not see the banks decreasing the interest rates even if the overall interest rates are coming down. However, you can still bargain with your existing home loan provider bank and see if they are ready to bring down the rates. If not, then you can approach the other banks to get your remaining home loan repayment taken over as a new home loan and you get the benefit of the low interest rates.
Hence, overall you pay less fixed price at the start, and later also your EMI payments come down in the long run making it beneficial to you.

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Now consider other case: You buy home on loan when interest rates are less and home prices are at peak.

The problem with this scenario is that your fixed cost that you pay to the builder is high. Property rates will be at their peak, everyone will be blindly investing like mad, so high demand backed by low interest rates will mean high proeprty prices.
The initial benefit will be low EMI payments because of low interest rates. But in the long run it might turn against you. When the economy switches modes, i.e. low interest rates turning out to be high interst rates, it will increase your EMI significantly causing your recurring high cost, month after month. And remember, this will happen when the economy will become tight - less salary hikes, high inflation, less purchasing power and less money. So it is a bad situation overall.

Therefore, weigh your options properly. Consider your financial situation and the current state of economy and the interest rates, property rates and then go for a deal. Purchase wisely, dont follow the herd mentality. After all, its a once in a life tiem purchase of house