20-08-07
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#3
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Join Date: Jul 2007
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Hi Mike....the following article might be of some help.......but my personal suggestion would be to wait for the market to cool down a bit ....
Quote:
Many home loan borrowers have experienced the pain of rising interest rates in the recent past. Monetary tightening by Reserve Bank of India left many families see their EMI burden rise by as much as 25 per cent.
Where are interest rates expected to go from here? What should the new home buyers do? What should the existing home buyers be aware of?
Interest rate cycle nearing its peak
The interest rate hike by RBI was part of a conscious strategy to rein in inflation and curb credit growth in Indian economy. With wholesale price inflation well below 5 per cent now, experts are of the opinion that RBI might be done with the rate hikes for now. The recent decision of RBI to increase Cash Reserve Ratio instead of increasing the benchmark interest rate was an indicator of this trend. There are of course some voices amongst the experts that RBI might still take a view that inflation numbers are still on the higher side. That said there seems to a consensus that in all likelihood, the interest rate hike in near future, if any, will be one-off. In short, the interest rates are either already at their peak or nearing it. What it means for the new set of home buyers is that they should only opt for floating rate loans. One might argue that it is better to wait and watch while interest rates come down. However, we believe that if the home purchase is for own use (and not investment alone), it should not be affected by the interest rate cycle. Floating rate loans will anyway ensure that you get the benefit of interest rates coming down in future.
Interest rates charged to you may be sticky downwards!
It has been observed that banks are prompt to increase the interest rates on the loan when the benchmark interest rates go up. However, often the same degree of alacrity is not shown by them in reducing the rates despite the benchmark rate going down. While banks may have their own reasons as also clauses and disclaimers in the loan agreement to support this, as a borrower one needs to be vigilant of the rates charged. Even if the EMI has not changed with the increased interest rate (owing to increase in tenure instead), one needs to watch out for the downward revision of interest rate on the loan (the loan tenure should come down with the same EMI). So in the coming months, if the interest rates do come down, make sure to check if the downward revision in the interest cost has happened depending on the loan agreement.
Reduction in tenure or reduction in EMI?
While the interest rates rose, lenders gave borrowers the option of increasing the tenure or increasing the EMI. Similarly the reducing interest rates would mean the borrowers can either reduce the tenure or reduce the EMI.
Unless there are very pressing reasons to reduce the EMI, it is better to opt for a reduction in tenure of the loan. Not only it ensures a lower effective interest paid out over a long period of time, it also provides the flexibility of increasing tenure at a later date in case the rates increase again.
What should an existing borrower do?
The interest rates were at their lowest at the beginning of the recent retail credit boom. The huge growth in home loans was driven by a combination of factors including low interest rates. Majority of borrowers have borrowed either at the trough of the interest rate cycle or on its way up. Hence so far, we have not seen any well defined trends in terms of the behavior of lenders in a decreasing interest rate scenario - especially while dealing with their existing loan portfolio. On that front, the existing borrowers need to take an activist approach to ensure that they benefit from the interest rate reduction just as they were affected by the interest rates rise.
Source: rediff.com
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