Home Loans: Impact of Change in Interest Rates

With RBI’s downward revision of 50 bps in the policy rates and push from the government, housing finance companies and banks have started to revise their home loan interest rates downward. As a result, home loan EMIs have come down and this may prompt home-seekers to explore options of finding their dream home. At the same time, this revision also requires existing home loan borrowers to review their current strategy and change it if need be. Mentioned below are key points to keep in mind if seeking a new loan or thinking of changing from your existing one:

1. Fixed Rate of Interest Vs Floating Rate of Interest?

Over the years, a lot of lenders have stopped offering fixed rate of interest on home loans. However, some selected ones still continue to offer such rates. Some borrowers prefer to take fixed rate in order to do away with the stress involved with the floating rate loans. However, in the case where market outlook on interest rates is downwards, it is most wise to opt for floating rate products and not the fixed rate ones.

2. Insuring your property

The home loan agreements mandate the borrower to insure his/her property against losses from fire and natural calamities. In case the borrower does not insure the property, the bank reserves the right to insure the same by debiting the customer’s account and charge interest as a part of the EMI. It is always advisable to take insurance on the property as you get to cover the liability of the home loan in case there is a loss to the property.

3. Keep your mind open to a Balance Transfer on your home loan

It is an important thing to consider for the existing loan customers. With the banks reducing rates for fresh loans, if your lender has not offered you the same flexibility as a rate revision then it’s wise to move to another lender especially with the RBI asking banks to waive the prepayment charges. Asking your existing lender to transfer your loan to another lender may also put pressure on the existing one to lower the interest rate. Another factor to keep in mind is that in case there are any pre-closure charges, the saving on switching the loan has a net benefit.