By Nitin Saxena
The market trends indicate that in the near future the interest rates, especially for housing, are going to move northwards. This is really bad news for those who have availed housing loans under the ‘floating rate’ scheme, and to those who are yet to avail the loan. As per the present indications, the soft loan regime is going to end very soon and the interest rates may go up by 1.5 to 2. Increases in interest rates will certainly affect the EMI (Equated Monthly Instalments) thereby affecting the budget of the common man. For example, an increase of 1 percentage point, i.e. from 7.5 per cent to 8.5 per cent would change the EMI for a lakh rupees from Rs 806 to Rs 863.
We will analyse the merits and demerits involved in the switchover. Those who have availed home loan under ‘fixed rate’ also need not feel happy because ‘fixed interest rates’ are always 0.05 to 0.75 more than ‘floating interest rates’ and home loan providers (lenders) are coming out with an option to change the interest rates even in the ‘fixed rate’ option, during the currency of the loan, if the movement in interest rates is too high. The so-called ‘fixed rates’ are not that fixed and the ‘floating rates’ are also not that ‘floating’, since the lenders rarely pass on the benefits to the borrowers in case of any fall in the interest rate.
But with the news of rise in interest rates, the borrowers are unable to decide their future course of action, and do not know as to how they can pass through the phase without any additional financial burden. The home loan providers are charging exorbitant sums towards conversion charges/costs from those who are going for such a switchover. Whatever may be the option, it is the hard-earned money of the borrower that is going and the banks are enriching themselves in this fluid situation.
Many will think that the best option available to them is to switch over to ‘fixed rate’ option, as the same has been recommended by many a financial adviser, and also stands to logic. In such a switchover, one can take the precaution that the losses do not outweigh the profits. The borrowers have to go through the loan documents carefully before signing the same.
Many will think that the best option available to them is to switch over to ‘fixed rate’ option, as the same has been recommended by many a financial adviser, and also stands to logic. In such a switchover, one can take the precaution that the losses do not outweigh the profits. The borrowers have to go through the loan documents carefully before signing the same. Most of the home loan providers have provided that the new documents under ‘fixed rate’ option should invariably contain the clause reserving the right of the lender to revise the interest rate during the currency of the loan, if the rate moves too fast and the difference is too steep. The lenders generally arrange the repayment schedule in such a way that the borrower will start realising the pinch only after payment of the entire interest part. The borrower should also keep an eye on the market movement, and if he feels that the interest rates will stabilise after some adjustment, then there is no need for him to go for any change by paying the huge transaction cost.
Borrowers generally think that the transaction costs to be paid by them towards the switch-over would be recovered from the savings on the interest cost. Here certain important factors, like the remaining period of the loan, outstanding loan amount, the rate of transaction charges and the difference in interest rate, will certainly play a vital role in enabling the borrower to decide. The interest rates in ‘fixed interest rate’ option are divided into three slabs, i.e. upto five years, six to 18 years and 19 years and above. Borrowers should select the slab taking into consideration the remaining period of the loan and the loan outstanding will also be considered before a decision is taken by the borrower.
In a given situation if the outstanding loan is Rs 14 and the charges to be paid are around 1.75 per cent, then the outgo in the form of conversion charges are around Rs 24,500 and it is Rs 21,000 for an outstanding loan of Rs 12 lakhs, and if the charges are around 1.5 per cent for an outstanding loan of Rs 12 lakhs, then conversion charges would be Rs 18,000. The aforesaid factors should be kept in mind by those who want to avail the switchover option.
A better course would be to wait for a few days to understand the market movement. If the movement upward appears to be imminent, then after carefully analysing the situation, one should take a decision to save on costs and get appreciation on his investment.