The interest rates on home loans have started indicating a downward trend as the Reserve Bank of India (RBI) cut its cash reserve ratio (CRR) last month. The cut in the CRR means more liquidity available for banks, and thus they will be more aggressive with their lending schemes.
This trend has been visible in the strategies of banks. Many banks have announced interest rate cuts on their new home loan schemes.
Outlook on interest rates
Interest rates follow a cyclical pattern over a long term. They were at low levels during 2007-08 and then went up due to a higher inflation rate prevailing, and consequent tightening in the monetary policy by the RBI in 2010-11.
Now, the inflation rate is showing signs of cooling down and the RBI has started softening its monetary policy stance. Analysts believe the interest rates will come down in the near to medium terms.
Lower rates for borrowers
Most banks have not reduced their interest rates for existing home loan accounts, citing the reason that the cost of funds have not yet come down. However, analysts believe the RBI is softening its monetary policy stance and therefore an interest rate cut in the near future is possible. This will, in turn, result in lower interest rates for existing borrowers as well.
Banks have already started offering attractive interest rate schemes for new borrowers. Analysts believe with signs of softening in key interest rates, there will be a further drop in interest rates on new home loans in the near future.
Investors can also explore the possibility of a lower upfront processing and other fees while applying for a home loan.
Floating or fixed rate loan?
In general, there are two types of schemes. In the fixed interest rate scheme, the interest rate remains fixed for a certain duration. On the other hand, it keeps changing in line with the market conditions in a floating interest rate scheme.
Since the interest rates are indicating a downward trend, you should opt for the floating rate scheme. You can also go for a scheme that offers a partly fixed and partly floating rate, or a fixed interest rate that also provides an option to lock-in at lower rate in future by paying a conversion fee to the bank.
Here are some points you should keep in mind while going in for a home loan:
Factor in volatility
First of all, it is important to draw up your financial plan keeping in mind volatility and cyclical nature of home loan interest rates. You should expect higher interest rates during certain periods of your home loan tenure.
Home loan interest rates have become cyclical with a probability of them going higher than what was available at the time of the loan disbursement. Therefore, it is ideal to ensure the EMI is not more than one-third your monthly take-home income.
Choosing the lender
It is important to choose your bank carefully. It is your long term companion, and at times, it is not so easy to change the bank. It will also entail an additional cost to change your bank. Since the home loan is a long-term commitment, it is important to be selective about the bank.
It is helpful to get some feedback from other borrowers about their experience with the bank. You should be aware of the positives and negatives.
It is advisable to make some plans for savings after taking into account the EMI payments and regular monthly expenses. This accumulated fund can be used for part prepayments on the loan to reduce the EMI burden in high interest rate phases.
From : The Times of India