Tags:
Journalism of Courage
What has happened?
Last week several leading private banks raised the interest rates on their home loans. For the leading lenders,interest rates on floating rate schemes have now risen to around 8.75 per cent to 9.5 per cent,depending on the loan amount. Teaser rate schemes,which promised a low rate of interest for the first few years,also appear to be on their way out with several banks withdrawing them.
Why are banks raising rates?
The primary reason is that interest rates within the economy are headed upward. Inflation has become a major threat. The central bank raised the cash reserve ratio by 75 basis points in its last monetary and credit policy review so that there would be less money chasing goods in the system. There is widespread expectation that policy rates repo and reverse repo rates may also be hiked in future.
With interest rates going up,banks had to hike their deposit rates otherwise it was becoming hard for them to attract deposits. Thereafter,it was only a matter of time before they increased their lending rates as well in order to protect their margins.
Should a new borrower take a floating- or a fixed-rate loan?
When interest rates within the economy are going up,the knee jerk reaction would be to think of a fixed-rate scheme. That would not necessarily be the right response.
The answer to this question should depend on your disposition and your financial situation. If you can live with some uncertainty,and have some surplus funds that will allow you to absorb the shock of an increase in EMI,go for a floating-rate scheme. After all,these schemes are much cheaper than fixed-rate schemes. Besides,home loans are long-term loans. Over a 15-20-year tenure,you will go through several rate cycles that will even out the interest rate you pay.
But heed this caveat: in India floating-rate loans are not fully transparent. Lenders are quick to raise rates but tardy in lowering them. The regulator is,however,taking steps introduction of base rate as the benchmark rate and ban on lending at below this rate that could make these schemes more transparent in future.
If,on the other hand,you are the type of borrower who will lose his nights sleep whenever newspapers talk about an impending hike in home-loan rates,and you lack the surplus funds required to cushion the shock of an increase in the EMI,go for a fixed-rate scheme. Another advantage of these schemes is that since your liability on the home loan front is fixed,you can plan your finances much better.
Whatever you do,go with a lender whose pre-payment charge is low.
