Float away to your dream home
Post the RBI's rate cut of 0.25 percent, is the time now conducive for you to take the plunge? Analysts certainly think so and even recommend opting for a floating interest rate on your home loan. Read on to find out...
People were eagerly waiting for the lending rates to come down and recently, the RBI answered their concerns by slashing the repo rate by 0.25 percent. The interest rate has been witnessing new lows continuously but now, financial experts are estimating that the rate won't correct further from the current level. In such a situation, what should be the right move for the homebuyers looking for a home loan? Will the rate cut provide an immediate benefit to the existing borrowers? Should new buyers go in for a floating rate or a fixed rate home loan?
"Borrowers who have availed home loans from banks at a flexible interest rate are unlikely to witness an immediate impact of the RBI's rate cut. This is applicable for home loan borrowers who have their home loans linked to the base rate or the MCLR. In both the cases, the lenders are likely to pass on the benefits of the rate cut. This period may vary from six months to one year (as agreed mutually between the bank and the borrower) for borrowers who have their home loans linked to the MCLR. This time duration is similar for investors whose home loan interest rates are connected with the base rate," says Harshil Mehta, CEO, DHFL.
What does the future look like?
With the Consumer Price Index (CPI) inflation at the five percent mark and expected to hover around the same level till March 2017, there was a strong case for a rate cut. The MPC (Monetary Policy Committee) of the RBI responded as per the expectations by reducing the repo rate by 25 bps to 6.25 percent, consequently bringing it to a six year low level. Market experts expect this downward rate cycle to continue in the coming months. As of now, the headline inflation (CPI) has remained sticky at the 5 percent mark (medium term target is 4 percent within a band of +-2 percent). A meaningful upward swing in this number, might result in the MPC considering taking a hawkish stand to tackle the inflation.
"Currently, where the inflation is going down significantly, the GDP shows prominent signs of improvement the fiscal deficit being under check and government being under pressure to boost the economy; you can expect further interest rate cuts in the near future. India also has to bridge the huge gap in the interest compared to most of the developed countries. So, the government is under continuous pressure to reduce the rates further," explains Vaibhav Sankla, director, H&R Block India.
The wait and watch game:
A fixed interest rate home loan is when the repayment of the home loan is fixed in Equated Monthly Installments (EMI) over the entire period of the loan. In a floating interest rate home loan, the rate of interest is dynamic and varies with market conditions. Such loans are linked to the base rate and are subject to revision upward or downward depending on the fluctuation in the interest base rates with the changing market conditions.
Satish Kotian, COO, Aspire Home Finance suggests, "The RBI has cut the repo rates, six times since January 2015 and the current level of 6.25 percent is the lowest in six years. Market experts predict this downward rate cycle to continue in the near future and with this expectation, a home-buyer might want to go for a floating rate on his/her home loan to benefit from the rate cut. A buyer would want to go in for a fixed rate typically in cases when the downward rate cycle flattens out and when the possibility of a rate hike increases."
Experts believe that interest rates on home loans are low today and as the repo rate cuts get further announced, home loan rates are likely to fall in the coming quarters with a steady global economic recovery.
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