Monday, 9 January 2017

Lower Interest Rates: A Reason to Look Forward To 2017

The most eventful year in recent years has finally come to an end. And if you think that Donald Trump as the US President, Baahubali: The Conclusion, Deepika Padukone's XXX: Return of the Xanger Cage and even Priyanka Chopra's Baywatch aren't enough reasons for you to look forward to 2017, there is exciting news for those who are still to buy their own home in India.
Despite demonetisation, weird weather conditions and growing hostilities between India and Pakistan, 2016 laid the foundation of some much needed reforms for a brighter future for the country, in which curbing black money and a push towards a cashless economy top the list.

What's New in the Housing Sector?

The Modi government is mulling a new scheme to boost the housing sector which will be announced in the 2017 budget. This scheme may use the money from the demonetization drive. A news article published in The Financial Express on November 29, 2016 says that the new housing scheme will have just 6-7 % home loan interest rate. There are prominent chances that banks and home finance companies will find room to lower loan rates as well, in order to encourage people to buy homes.


Need for Lower Interest Rates

Interest rate is the cost of borrowing money or simply compensation for the risk of lending money. Lower interest rates make it cheaper for the customer to borrow, encouraging spending and investment.

In theory, here is what lower interest rates can do:

  • Lower Interest Payments: Decline in the interest rates means lower housing loan EMI, which in turn means that the borrower's monthly cost of mortgage repayments decline, leaving the householders with more disposable income. This should cause a serious rise in consumer spending.

  • Stimulates Economy in Recession: It is known that during a recession, the RBI lowers the interest rates to entice customers to purchase more credit products and loans. This activity helps to boost and stimulate the economy. It is an economic mindset that people buy homes and automobiles when rates are low.

  • Increased Demand for Products and Rising Employment: As economic activity picks up, demand for products increases. And in order to meet the demand, companies hire more workers. This activity can create more jobs and put a full stop to the surging unemployment rate.

  • Boost in the Price of Shares: In the lower interest rates period, assets like shares, bonds and assets become relatively more attractive, and people tend to buy shares that offer a better rate of return than saving their hard earned money in a bank.

Banks, home finance companies and people are eagerly waiting for what the 2017 budget holds in store for them.

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