After a surprise repo rate hike in May by 40 bps, RBI (Reserve Bank of India) unanimously increased the benchmark rate by 50 bps in June, taking the repo rate to 4.90%. Given the current back-to-back hikes in repo rate, there is high anticipation that the cost of taking a loan will grow even more in the upcoming months.
For small ticket loans, this hike is likely to play an important role in the thorough cost of availing a fund. As for home loans, this rate hike is likely to drive excessive growth in the real estate sector, which was stagnant for nearly 3 years. During and before COVID-19, the cost of buying a property was low because the market was flooded with numerous unsold inventories as well as the buyers’ sentiments were poor. As per reports, many builders sold off their existing inventories without taking sufficient margins.
However, now as RBI is hiking the repo rate to curb inflation and put a mechanism in order to absorb substantial liquidity from markets, particularly public, and private sector banks, many people may be in a dilemma to choose between fixed rate home loan and floating rate home loan. Before moving on with the suggestion, let’s first get the fundamentals clear.
What is the difference between floating home loan interest rates and fixed home loan rates?
Floating home loan interest rates are linked with repo rate. This means, as the rates in the economy go up or down, the housing loan interest rate too increases or decreases accordingly. However, fixed rate loans are tricky. While from the term it appears the rate is fixed, there might be a clause in the loan’s fine print that the lender may increase the interest rate at any point, triggered due to few developments.
Fixed or floating interest rate? Think wisely
As the rates are moving upward with zero signs of any interest rate cut in the upcoming times, home loan seekers and existing borrowers must opt for fixed interest rate instead of floating rate to save up a decent amount in EMI and interest over a longer time period.
Presently, however, it might be tough to avail a long-term fixed interest rate loan as most loans are mixed in nature. A mixed interest rate home loan is a blend of both fixed and variable rates during the loan tenure. Such loans generally have fixed interest rate initially for up to 3-5 years, followed by variable rate during the rest of the loan period.
Thus, you may now apply for home loan with mixed interest rate if you are a new home loan applicant. Note that you always have the option to convert your fixed interest rate into floating if the difference in interest rates makes financial sense. However, before you submit the final application, ensure to take the help of a home loan EMI calculator to compute a suitable EMI as per your repayment capacity to avoid any loan defaults in the future.