As RBI cuts rate, should you go for fixed home loan

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The Reserve Bank of India (RBI), in a surprise move has cut the repo rate further by 0.25% to 7.50% to boost growth. This move has come as a pleasant surprise to bankers and experts, as most were not expecting RBI to cut rates so soon especially considering the fact that the first rate cut of 0.25% was done just 2 months back in January 2015. The rate cut was backed by some positive inflation numbers. The wholesale inflation in January stood at -0.4% and retail inflation was at 5.11%, much lower to RBI’s target of 6% by January 2016.
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RBI also cut the statutory liquidity ratio (SLR) by 0.50% to 21.5%, thereby encouraging banks to increase lending. Both of these moves have prompted many private and nationalized banks such as AXIS, HDFC, ICICI, IDBI and SBI to come up with fixed rate home loan products.In general, home loans are based on floating rates linked to bank’s base rate, and these keep on fluctuating depending on the movement of base rate. If the base rate increases, the floating home loan interest rates also increases, leading to increasein equated monthly installments (EMIs) and vice-versa. These movements in rates at times can be steep and can badly hamper the monthly budgets of families. For example, it was not long ago when the interest rates on home loans for existing customers where increased from 8% in 2009-10 to 12.5% in 2011 rendering many homeless. This period coincided with one of the toughest phases of economy and many people lost jobs due to recession. In such peculiar situation, servicing an increased EMI became a real issue. The EMI for most families for a loan amount of 50 lakh rupees for 20 years period increased from 58,551 rupees in 2009-10 to as much as 79,530 rupees in 2011-12, leaving home buyers stressed, anxious and jittery. However, most of these issues can be addressed by subscribing to fixed rate home loan products, let’s see how –
Gives you an option to switch to fixed rate loans
Most banks are offering options to existing customers to switch to fixed rate products by paying nominal conversion charges. For example, with Axis bank, you can avail this offer for a loan ticket size of up to 50 lakh rupees for 20 years duration. The interest rate is fixed at 10.40%, while the pre-closure charge is 2%.Converting to lower fixed rate from higher floating rates makes great financial sense as it will lead to –

  • Increased savings month on month
  • Lower EMI burden
  • Greater visibility on monthly spend
  • Relieve from changing EMIs
  • Improved loan eligibility. You can check your eligibility with axis bank home loan eligibility This will also help you to avail top-up loans on your housing loan in case any need arises

Having said this, you must carefully weigh the pros and cons before opting for these loans.
Exercise caution and carefully read the clause
There are many fixed rate plans such as HDFC bank’s ‘TruFixed plus home loans’, in which the rates are fixed at 10.15% for loans up to and including 75 lakh rupees withfixed duration options of 2, 3 or 10 years and loan term of 20 years. In this case, the fixed tenure of 10 years makes a lot of sense as it will help you guard against uncertainties of interest rate fluctuations in future. However, not many products in market have such big tenure for fixed rates. For example, SBI, India’s largest public sector bank, has a clause which lets it reset the fixed rate scheme every 2 years. This effectively means that the entire purpose of opting for such loans is defeated. Hence, it is advisable that you exercise caution and carefully read the clause before opting for any kind of loan products.

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