Don’t go for fixed rate loans or extend loan terms: Indiabulls

Indiabulls Housing Finance Manager Says Raising EMI Is Better Than Extending Loan Term

The corporate sector had hoped otherwise, but the Reserve Bank of India (RBI) today raised its policy rates by another 25 basis points. This will likely make home and car loans even more expensive, and real estate agents believe real estate prices will rise further. In this situation, Sachin Chaudhary, Chief Executive of Indiabulls Housing Finance, advised borrowers not to opt for fixed rate loans or extend the term of the loans.

“In a high-rate scenario, try to increase your EMI if your pocket allows. Don’t go for fixed-rate loans because rates are expected to drop,” Chaudhary said. He also argued that it was better to keep the tenor constant than to pay a fixed amount of EMI. In the latter case, the interest increases considerably when the loan is repaid. “Don’t increase the term of the loan,” he said.

The head of Indiabulls Housing Finance also explained that in the case of a fixed term, the effective rate is much lower, as deductions on home loans lead to tax benefits. He demonstrated this through an example: when the duration is fixed for 180 months, and if the rates are increased by 0.25% with each successive EMI payment, even if the amount of EMI on each Rs1 lakh increases, the overall increase in the interest rate after six successive increases is 9%. However, when the EMI is fixed and the duration continues to increase even by one month, after six extensions, the interest rate is increased by 22%.

Mr. Chaudhary indicated that in the current situation, it was better to renegotiate the interest rate rather than switch to another financial institution. He also said that prepayment was the best option and that partial prepayment could reduce the term of the loan by up to 50%.

Most banks offer loans that have “loan hook” principles, ie a fixed rate for the first few years, then on par with variable rate loans. Experts believe that interest rate hikes are nearing their peak and that a lock-in for 3-5 years is not advisable. “In most cases, hybrid fixed-floating loans favor the lender and not the buyer,” says one analyst.

The RBI today announced an interest rate hike, the 12th time since March 2010. The repo rate now stands at 8.25% and the reverse repo rate at 7.25%.

Indian Overseas Bank Chairman and CEO M Narendra said: “I think the banks will wait until the end of the month before making a decision on an interest rate hike.” Bankers are of the view that the rate hike will be passed on to customers sooner rather than later.

About Brandon A. Hood

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