The interest rate on home loan has been moving upwards in a steady manner. The inflation rate that is prevalent in the economy has been the cause for such an increase in the interest rates and there are no signs of the inflation coming down. Though the Reserve Bank of India (RBI) has been taking various measures to control inflation, there is very less improvement on the situation. The RBI has been increasing the interest rates in an effort to check further increase in inflation.
Due to this approach by the RBI, the banks have increased the interest rates on home loans. Interest on personal and auto loans have also seen an increase, which in turn has resulted in the increase in EMIs. In such a scenario, it is difficult to decide whether to settle in for a fixed interest rate or take a chance and go in for a floating rate. Considering the past, it seems to be safe to opt for a fixed rate as the inflation seems to never come under control in the immediate future. As soon as the bank decides to increase the interest rates, home loan interest rate is increased immediately leaving the borrower at a disadvantage. As the loan borrowed for purchasing a house is large and the tenure long, it becomes crucial to decide on the type of interest.
In a fixed interest scheme, the interest rate is fixed at the time of sanctioning the loan and thus the borrower pays a standard rate throughout the loan tenure. In the event of an increase in the interest rate, he pays the lower rate as fixed earlier. If there is a reduction in the interest rate, the borrower ends up paying more.
At present, the banks have reset a clause wherein it gives the freedom to increase the interest rate in the event of the market interest rates increasing drastically, even if the borrower has opted for a fixed interest scheme. If it is a floating interest rate, the increase in the interest rate corresponds to the market interest rate. The borrower pays interest on the loan as per the prevailing interest rate in the market at that point of time. If the interest rate increases, the borrower pays more and if it decreases, he pays less. In such a complicated situation, the borrower is left to decide for himself. He has to make a conscious decision on which type of loan to choose.
The present inflation has pushed the interest rate up. When the inflation comes down, the interest rate will come down too. The measures taken by the RBI to bring inflation under control will yield results, though a prescribed timeframe cannot be given. Moreover, high interest rate is not good for the growth of the economy.
To conclude, it makes good sense to opt for floating rate. The interest rate has almost reached the peak. Though we can expect one more round of increase, it will come down in the long term. |