Home Loan Rates – Should You Go for Fixed or Floating Rate?
The end of the last year marked something significant in Home Loans that was not aggressively marketed by the newsmakers. Many of the prominent banks have launched home loan products on fixed rates. Conventionally, the home loan rates are floating in the country, and they are determined by the current interest rate regime. These regimes are based on the monetary policy of the central bank and rise and fall accordingly.
Unlike Personal Loan or Auto Loan, a home loan is usually floating but the known banking giants like HDFC, SBI, ICICI, and Axis have come up with fixed-rate home loans. There have been examples of banks coming out with fixed-rate loans, but they are usually made available for a limited tenure.
WHAT TRULY FLOATING RATE AND FIXED RATE MEANS?
A floating interest rate, also known as a variable or adjustable rate, refers to any type of debt instrument, such as a loan, bond, mortgage, or credit that does not have a fixed rate of interest over the life of the instrument. So the rate of interest varies with the base rate of the banks.
A customer’s EMI in this case would go up and down with the change in the base rate of the bank. If the base rate of the bank surges, the installment amount will also go up and vice versa. But on the contrary, fixed-rate does not alter the fixed installments of the month and is unaffected by the market moves of the central bank.
WHY BANKS ARE OFFERING FIXED RATES FOR HOME LOANS?
Out of the several significant reasons, the most trivial is the current housing loan growth. The housing loan segment growth is slow and inactive due to the slow GDP growth; soaring inflation and high borrowing costs have shot the real estate market. Banks now want to serve the cake by offering a fixed rate so as to protect the concern of the customers.
The major point, however, is that there is a great probability of home loan rates coming down in the next few months. In a surprise move, RBI on Thursday (Jan 15, 2015) cut key interest rates by 25 bps and almost promptly public sector banks namely; the United Bank of India and Union Bank of India decreased their base rate by 25 basis points to 10%.
This has made floating loan rates in these banks economical at a bargain. Banks are not allowed to lend below the base rate, and all floating rate loans are linked to the base rate.
Inflation is at a record low, and there is growing evidence that RBI will constrain the growing uproar for a rate cut. Banks now want to acquire as many customers as they can, at a higher rate of interest so that they can optimize their profits when home loan rates drop.