Housing Loan Interest : Floating Rate or Fixed Rate...!
by Mr. Suresh
Parthasarathy,
One of the challenges
while buying your dream home is the challenge of deciding how much to borrow.
And the next big
decision to make is whether to go in for a fixed or / a floating rate of
interest while repaying the loan.
Some people lock into a
fixed rate because it offers them the ease of the same sum throughout the loan
period and makes it convenient to apportion money. Others like to take their
chances and go with the tide, literally.
To make an intelligent
decision on this, borrowers must understand the current economic cycle and
decide what suits them.
Before deciding on fixed
versus floating rate one must look at various issues.
One of the best ways to
consider the deposit rates in banks. If bankers keep cutting the fixed deposits
interest rate, it is a clear marker to settle for a floating rate.
When the economy looks
up and interest rates slip from their peak, it is better to hope for a rate cut
in the years to come.
In a particular economic
situation, do spend some time to understand how to decide on the best option.
Let us go through the
merits and demerits of both the fixed and the floating rates.
Fixed interest
rate..!
Fixed rate means that
the lender fixes the rate for the entire loan period and the borrower has to
pay back the loan at equal installments through the period Equated Monthly
Installment (EMI).
But as lenders became
experienced over the years, they have made the fixed rate not truly fixed.
They have introduced a
several combinations to the concept of fixed rate. In 2004, for instance, many
housing loan institutions tied up with builders and offered competitive rates.
In the course of time,
some of the lenders went overboard & offered a fixed rate of 7% throughout
the loan period. But, when the economic tide -the interest rate -started to
rise, it put lenders in a fix as they were losing money.
Borrowers who had opted
for a true fixed rate were blessed with lower EMI outgo.
 |
| Suresh Parthasarathy, CFP, Chennai. |
With that experience
under their belt, most lenders have increased the spread between floating and
fixed rates. Non-Banking Finance Companies (NBFCs) like HDFC have started
to offer a “Variable Fixed” for 2 to 3 years and “Tru Fixed” for 10 years.
After that period, the
interest rates are re-fixed. So, in that sense, there is no fixed rate
throughout the loan period.
On the other hand,
lenders such as SBI have preferred to stay with the floating rate.
Floating
interest rate..
Floating rate means that
the interest rate varies according to the market cycle.
In a good economy, the
interest rate will be stable. In a bad cycle, the interest rate keeps
increasing.
It also happens in an
overheated economy, when savings come down because there is no charm in putting
away money as banks offer low interest rates on their savings.
Consequently, those who
borrow from banks will also see their EMI or / the period of the loan changing
as the interest rate fluctuates.
The only drawback is
that in an upward cycle, the interest rate changes are fast, but in a downturn,
it falls very slowly. Many of the time, borrowers enjoy the lower rate after a
considerable lag.
Even this year, RBI cut
more than 0.75% (75 basis points), but at the ground level, the transmission is
yet to fully take off.
Conclusion..!
Inflation is coming down
as commodity prices are under pressure and that augurs well for India. Since
our economy depends predominantly on commodities & the trend is favourable right now - interest
rates are likely to come down in next few years.
Over the next few years,
interest rate will be under pressure and it will be prudent to borrow at a
floating rate.
If the cycle turns back after few years, shift
to another lender. With the new loan, go in for a fixed loan, based on the
tenure of the loan.
Instead, if your
existing lender itself offers a fixed rate with a nominal charge, it is better
to accept it to reduce the hassle of shifting.
In the process there may
be a charge associated with the processing, so do evaluate the cost before
moving to fixed interest rate.
Suresh Parthasarathy,
See what i am tweeting :@parthasuresh.
Registered Investment Advisor,(SEBI),
Columnist,
Founder,Myassetsconsolidation.
Mobile 98404 54737
| Skype: | suresh.partha |
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