If you heard the home loan agents last month, they would have convinced you that the home loan rates were falling like stones and were going to nudge 6.5 per cent ‘very soon’. They pulled out the US home mortgage history and used the cost of funds argument to make their case. Case for taking a variable rate, they said, don’t fix it yet, they pushed. Information from the ground says that the upward movement in home loan rates has already begun. Loans that were going at 7.1 per cent fixed are now touching 7.5 to 7.6 per cent. Circulars sent out to the Direct Selling Agents (DSAs) tell them to not commit to any rate below 7.5 per cent in the fixed home loan category. Though there is no change as yet in the variable rates, it is a matter of time that those at a 6.8 per cent variable rate begin to pay more EMI. Every 0.1 per cent difference in rates translates into an extra Rs 6 per lakh EMI each month. So a 0.5 per cent increase will mean an extra Rs 1,200 per month or Rs 14,400 per year in EMI payments. Over a 20 year period this translates into an extra cost of Rs 2.88 lakh. Some of the reasons given for this upward movement is the revival of credit off-take from the corporate sector and a fear that huge government borrowing (that the objectives of social development will entail) will soak up funds, raising the price of money and hence rates. Long term government bonds are up and the 10-year bond returns have gone up by around a quarter percentage point to around 5.30 per cent per annum from 5.06 per cent in April end. Other reasons are the expected increase in US interest rates and the fear of inflation rising. We have been advising readers to go in for fixed rates for a variety of reasons. Apart from strong signals from the market saying that this was as low as the rates were going to get, the other reason is that a ‘variable’ rate in the Indian seller-driven market is not really fair. Many people with variable rate loans have discovered that the banks peg their rates to their internally decided Prime Lending Rates (PLRs) and as the interest rates fall, they keep the PLR steady and give loans at minus PLR to new borrowers, keeping the cost high for the older borrowers. Will the banks do the same when rates rise, keep the rates constant? Unlikely. Given the fine print they make a customer sign and the lack of a consumer movement to take on the banks, it is best to go for the safe-now policy and take a rate that is clear upfront. Even then, check the document to see if the bank does not reserve the right to change the ‘fixed rate’ at its own discretion, like one of biggest banks of Indian has done!
