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 rates, 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 expected to drive excessive growth in the real estate sector, which was stagnant for nearly three years. During and before COVID-19, the cost of buying a property was low because the market was flooded with numerous unsold inventories and the buyers’ sentiments were poor. According to reports, many builders sold off their existing lists without sufficient margins.
However, as RBI is hiking the repo rate to curb inflation and put a mechanism 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 loans and floating-rate home loans. Before moving on with the suggestion, let’s clarify the fundamentals.
What is the difference between floating home loan interest rates and fixed home loan rates?
Floating home loan interest rates are linked with repo rates. As the economical rates increase or decrease, the housing loan interest rate increases or decreases accordingly. However, fixed-rate loans are tricky. While it appears the rate is fixed from the term, 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 a 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 rates instead of floating rates to save up a decent amount in EMI and interest over a longer periodHoweverer; it might be tough to avail of a long-term fixed interest rate loan as most loans are mixed. A mixed-interest rate home loan is a blend of fixed and variable rates during the loan tenure. Such loans generally have set interest rates initially for up to 3-5 years, followed by variable rates during the rest of the loan period.
Note that you can always convert your fixed interest rate into floating if the difference in interest rates makes financial sense. Thus, you may apply for a home loan with a fixed interest rate if you are a new applicant. 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.