How to tackle rising home loan rates

The past few days have seen several home loan companies announce a hike in interest rates. This is the second time in this calendar year that home loan rates have gone northwards. We have outlined the reasons for the same with a clear-cut strategy for prospective home loan seekers to tackle this scenario.

The latest bout of home loan rate hikes should leave no doubt in the minds of home loan seekers that interest rates are well and truly bound on a northward journey. If interest rates rise even further, it is unlikely that home loan rates will remain unscathed.

Another reason why home loan rates have hardened is because the Reserve Bank of India has called for stricter provisioning norms on home loans. This means that home loan companies will now have to provide for a larger sum of money against their home loan assets. It is not surprising that they have passed on a portion of this burden to the consumer by hiking home loan rates.

Get the real picture

Fixed rate (%)			Floating rate (%)
	Before	Now	Before	Now
HDFC	9.75	10.50	9.00	9.25
IDBI Bank	9.50	10.00	8.50	9.00
ICICI Bank	9.75	10.25	8.50	9.00

Please note that rates given above are only indicative. Companies are known to offer varying rates on case-to-case basis.

Evident from the above table is the discernible rise in the home loan rates across companies. For instance, HDFC's fixed rate home loans have inched upwards to 10.50 per cent. Correspondingly, the floating rate on home loans has also moved up to touch 9.25 per cent. For IDBI Bank, fixed rate loans (fixed for 5 years) are now available at 10.00 per cent (up 0.50 per cent) while floating rate loans can be availed at an interest rate of 9.00 per cemt (up 0.50 per cent).

What should home loan seekers do?
Going by the trend, it should surprise no one if interest rates on home loans rise even further as a consequence of the rising interest rate scenario. This being the case, home loan seekers should consider opting for a fixed rate loan (i.e. fixed for 3-5 years). This will protect them from a potential interest rate hike in the near term. At the end of the said 3-5 year term, they have the option of considering either to continue with the 'fixed' rate (if interest rates continue to rise) or migrate to a floating rate loan

However, in case an individual does not have the risk appetite to take the interest rate fluctuations in his stride, he may consider selecting the 'truly' fixed rate loans. Such loans have a fixed rate throughout the tenure of the loan. However, if interest rates were to decline going forward, the truly fixed rate loan will not reflect the fall in interest rates and the consumer will forfeit any chance of benefiting from a decline in interest rates. Put simply, your home loan will be a lot more expensive than what you had bargained for at the time of applying for it.

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