Home Loan: Floating or fixed? - Indian Real Estate Forum

arun · 04-08-07

Home Loan interest rates have been rising and it is not certain when will they stop. While signing up a home loan, consider various factors to decide on a fixed or floating interest rate such as prevailing rate scenario and your financial planning. A floating rate is always preferable when interest rates are declining whereas fixed rate is recommended if they're moving up.

If you want to opt for a floating rate, make sure your finances will allow for a higher Equated Monthly Instalment, else it may require repaying the EMIs over a longer tenure, which translates to financial commitment for an extended period. At present, if a customer is going to buy property, fixed rate is recommended. If s/he is going to take a 20-year loan which s/he plans to repay, as there is a prepay option, in seven years or more, then s/he should go for fixed rate. But if he thinks s/he will be repaying in three four years, then choose floating rate.

Pramod Kumar Jain, Executive Vice-President-Credit, PNB Housing Finance Limited, says, "I may expect that floating rate may decrease because earlier they were lower or they may increase by a quarter or a half per cent. I have reason that it will remain the same or decrease. The economy has been growing at 9.2 per cent. The industry's growing, the services sector is growing, monsoon is reasonably well as of now, inflation is 4.03, the latest figure compared to 6 per cent earlier. The only reason for an increase may be money supply that RBI may want to control."

A person opting for a fixed rate gets "tied to the same rate for a particular period," points out Jain. So, he asks whether it is sensible to pay 12.50 per cent for two years or instead pay penalty and repay at an interest rate of 11 per cent. According to Yogesh Popli of Ayam Associates, a property consultancy in Gurgaon, borrowers should opt for floating rate as fixed rates are on the high side at the moment are expected to come down in the next five or six months. Floating rates should drop as inflation rate is dipping and banks are contemplating lowering Fixed Deposit rates, he adds.

It would mean reduction in the interest rates for an FD linked product. "If someone wants to take a fixed rate, then he can switch to floating (in case rates fall) by paying conversion charges - which are approximately 2 per cent (of the outstanding loan)," he advises. The ICICI bank official says that "if floating rate increases, fixed rate will also go up."

So before taking the plunge and signing the form, it would be ideal to play the waiting game and think of the options. Wait till the movement of interest rates become clear and you'll have a good idea on whether to go in for fixed or floating interest rates.

11-08-07

Thanks for the information as it was very helpful. I am considering purchasing a home very soon and I have been researching interest rates. You make a good point that interest rates are on the rise. I need to apply for my home loan before the rates go up too high. Any suggestions?

mr_dutta · 20-08-07

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

04-08-07	#1
arun New Member Join Date: Oct 2006 Posts: 43 Thanks: 0 Thanked 0 Times in 0 Posts Rep Power: 1	Home Loan: Floating or fixed? Home Loan interest rates have been rising and it is not certain when will they stop. While signing up a home loan, consider various factors to decide on a fixed or floating interest rate such as prevailing rate scenario and your financial planning. A floating rate is always preferable when interest rates are declining whereas fixed rate is recommended if they're moving up. If you want to opt for a floating rate, make sure your finances will allow for a higher Equated Monthly Instalment, else it may require repaying the EMIs over a longer tenure, which translates to financial commitment for an extended period. At present, if a customer is going to buy property, fixed rate is recommended. If s/he is going to take a 20-year loan which s/he plans to repay, as there is a prepay option, in seven years or more, then s/he should go for fixed rate. But if he thinks s/he will be repaying in three four years, then choose floating rate. Pramod Kumar Jain, Executive Vice-President-Credit, PNB Housing Finance Limited, says, "I may expect that floating rate may decrease because earlier they were lower or they may increase by a quarter or a half per cent. I have reason that it will remain the same or decrease. The economy has been growing at 9.2 per cent. The industry's growing, the services sector is growing, monsoon is reasonably well as of now, inflation is 4.03, the latest figure compared to 6 per cent earlier. The only reason for an increase may be money supply that RBI may want to control." A person opting for a fixed rate gets "tied to the same rate for a particular period," points out Jain. So, he asks whether it is sensible to pay 12.50 per cent for two years or instead pay penalty and repay at an interest rate of 11 per cent. According to Yogesh Popli of Ayam Associates, a property consultancy in Gurgaon, borrowers should opt for floating rate as fixed rates are on the high side at the moment are expected to come down in the next five or six months. Floating rates should drop as inflation rate is dipping and banks are contemplating lowering Fixed Deposit rates, he adds. It would mean reduction in the interest rates for an FD linked product. "If someone wants to take a fixed rate, then he can switch to floating (in case rates fall) by paying conversion charges - which are approximately 2 per cent (of the outstanding loan)," he advises. The ICICI bank official says that "if floating rate increases, fixed rate will also go up." So before taking the plunge and signing the form, it would be ideal to play the waiting game and think of the options. Wait till the movement of interest rates become clear and you'll have a good idea on whether to go in for fixed or floating interest rates.

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11-08-07	#2
mike07 Unregistered User Posts: n/a	Thanks for the information as it was very helpful. I am considering purchasing a home very soon and I have been researching interest rates. You make a good point that interest rates are on the rise. I need to apply for my home loan before the rates go up too high. Any suggestions?