The two years of rock-bottom interest rates have come to an end. The repo rate, which was at 4 per cent for two years, has jumped to 4.90 within a span of five weeks. Market watchers say there’s more pain ahead. The repo is expected to climb to 6 per cent in the coming quarters. Inflation continues to harden with the war in the backdrop along with rising costs of essential commodities. If you were in the market to buy a home this year, what should you do?

The biggest component of your home costs is often your loan interest. The higher the interest, the bigger the costs, the greater the challenges in managing it over the course of the loan. If you take a loan of Rs 50 lakh for 20 years, the interest is Rs 43.04 lakh at a rate of 7 per cent. It’s Rs 46.67 lakh at 7.50, Rs 50.37 lakh at 8.00, and Rs 57.96 lakh at 9 per cent. What role should inflation, rising rates, and economic uncertainty play in your home-buying decision? Let’s look at things you need to keep in mind.

Do you have the funds?

Consider the funds you need to be ready with. If an under-construction property costs Rs 100, add another Rs 20 to 30 to budget for amenities, utilities, GST, stamp duty, registration, furnishing, financing, and various legal and documentation costs.

Of this, your home loan will cover the base price, amenities, utilities, paperwork, and GST. The rest needs to come out of pocket. It’s simpler with resale properties where GST, amenities and utilities are factored into the price for which you can borrow. Now, the lender will give up to Rs 90 for a low-value property (under Rs 30 lakh), or up to Rs 80 for a high-value property.

The rest — Rs 40 to 50 — must come out of pocket, either up front or gradually. At the very least, you need Rs 20 to take the next step. Second, in this ongoing scenario with escalating living costs, you need to be sure you can safely part with this money without affecting your finances.

Is your income stable?

You’ll probably need financing for your purchase. If you take a loan, you need stable income to repay the loan. Inflation leads to higher interest rates. At the same time, it also creates economic uncertainty.

There’s always the spectre of job loss. If that happens, your ability to service your loan is threatened. If you have the cash in hand, have emergency savings to tide over a job loss, and are confident of paying your EMIs through this uncertainty, you are prepared for your purchase.

Is your credit score good?

You need to be at least at 750 if you want some of the best loan offers. Even better at 800. If your score is low, your loan application may either be rejected or approved at a higher rate. If you finance at a higher rate in a rising rate scenario, your rate could escalate very quickly. Therefore, credit score readiness helps. Before you apply for any financing, make sure you have a good score.

Can you handle rate hikes?

Home loan rates today are still lower than 2019 levels. But they may rise rapidly. When rates rise, your loans get longer. Tenor adjustment protects borrowers from EMI spurts which can squeeze your disposable income. But if inflation keeps hardening, rates will keep going up, and your loan tenor will keep increasing.

Lenders want you to pay off your loan by a certain age. For most lenders, this is 65 to 70 years. Home loan tenors are usually up to 30 years. So there’s a limit to which your tenor can increase. Beyond the limit, your EMI will also increase. If you are borrowing late in your working life, you need to be prepared for this in case inflation remains hard and loan rates approach double digits.

Will you occupy the house?

This is the perhaps the most important consideration. Understand why you are buying the house. If your intention is self-occupation, it is ideal.

If you wish to be rooted in a locality, owning property can help your life plans. But if you are thinking of the house as an investment, especially for rental income, you may want to reconsider. The costs are too high; the returns may be abysmal.

According to RBI data, real estate returns have been trending to zero per cent in recent years. Rental yields are less than savings accounts offering 4 per cent. Net yields (after taxes, interest, and maintenance costs) are negative. Real estate investments are difficult to enter and exit. In a climate of economic uncertainty, you may wish to reconsider all aspects of your investment decision.

In summary, financial and credit preparedness is most important, whatever be the economic scenario. If you are ready with the funds, have good credit, and can pay your loan as required, let nothing stall your home purchase. If you are not ready, you may want to wait a while.

The writer is CEO, BankBazaar.com

Investment in debt fund

• With the RBI raising rates, how does this affect debt funds and do I need to consider changes to my investment portfolio?

S. Karmakar, Calcutta

• Debt funds invest in interest-bearing instruments such as government or corporate bonds and money market instruments. A bond’s coupon rate is fixed at the time of issue at a certain price (face value).

If the interest rate rises, then these bonds look less attractive because they carry lower rates than currently available in the market and hence their prices fall due to lower demand.

Similarly, if interest rates fall, these bonds become more attractive and higher demand leads to higher prices.

If the bond prices fall due to interest rates going up, this leads to a decline in the NAV of fixed income funds and hence portfolio return from debt funds is affected.

Whether to alter your portfolio depends on several factors such as investment tenure, stop loss targets etc. While short-term returns from debt funds are affected due to interest rate risks, bonds markets tend to factor in the expectations of further interest rate hikes.

This means that the movement in the long-term yields may not be as sharp due to changes in interest rate.

Gold bond withdrawal

• Is premature withdrawal allowed from Sovereign Gold Bonds? What is the process?

P. Basak, Calcutta

• While the tenure for SGBs is 8 years, early encashment/redemption is allowed after the fifth year from the date of issue. The bond can also be traded on exchanges if held in demat form. You will have to approach the issuing bank branch, Stock Holding Corporation office or post office 30 days before the coupon payment date with a premature redemption request.

If you have any queries about investing or taxes or a high-cost purchase, mail to: btgraph@abp.in, or write to: Business Telegraph, 6 Prafulla Sarkar Street, Calcutta 700 001.