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Want peace? Fix that home loan now!
Shobhana Subramanian in Mumbai | November 11, 2004 09:51 IST
Banks and housing companies have signalled that home loans are going to become costlier after Diwali. The extent of the increase should be about 25-50 basis points, across maturities.
For those of you who are sitting on loans with a fixed rate of interest, you have nothing to worry about. If you are about to take a loan, it would be a good idea for you to lock yourself into a fixed rate of between 7.75 per cent- 8 per cent and protect your downside.
It's folks who have a loan with a floating rate of interest, who might want to check out whether or not it makes sense to switch to a fixed rate at this point. That's provided your banker allows you to switch in the first place.
HDFC, for instance has still not come up with a product which allows you to change from a floating rate to a fixed rate, though it says it will do so soon.
The current floating rate is 7.5-7.75 per cent and is expected to move up to 8 per cent. You could probably get a fixed rate loan at between 8 and 8.25 per cent. As the chart shows, the EMI per lakh (Rs 100,000) for an increase of 50 basis points for an outstanding tenor of 15 years is Rs 28.
So for an outstanding loan amount of say Rs 10 lakh, it would work out to Rs 280. However, if interest rates edge up further by say another 50 basis points, the increase in the EMI per lakh, again for a 15 year tenor is about six per cent (Rs 928 to Rs 985).
True, there is a cost for switching of 1.75 per cent on the outstanding amount according to ICICI Bank. This fee has to be paid upfront, which is a bit of a blow.
So, on an outstanding loan amount of Rs 10,00,000, the switching fee would set you back by Rs 17,500 immediately.
However, if you spread this amount over the life of the loan (say ten years) it would amount to Rs 146 extra per month. For a 15-year balance tenor it works out to Rs 96 extra per month.
Your banker may try to soften the blow and persuade you to retain the same EMI, suggesting that you change the tenor. But it makes sense to increase the EMI even if means sacrificing some comforts now and writing out cheques all over again.
The increase in the tenure for a loan with an outstanding tenor of 15 years, if interest rates move up by 100 basis points is two years or 24 more EMIs. That is an increase of 14 per cent.
If interest rates move up by 200 basis points the tenor could go up by as much as five years or 60 EMIs, an increase of 33 per cent.
The chances of interest rate going up cannot be ruled out . Sure , over a longer period of ten years rates could move down again. But, with even experts having failed to predict rates correctly, its better not to take a chance.
Remember that when floating rates go up by 100 basis points, fixed rates go up by an even higher amount of 150 basis points. So don't put it off till the next round of hikes. Fix that loan now.