Fixed interest rate home loans are back with a bang. Existing home loan customers as well as new property buyers are offered this option by banks and housing finance companies. After waiting for years for the interest rates to come down, home loan customers are not much optimistic about saving money on floating rate home loans. No wonder, there is considerable interest for fixed rate home loans. But is this deal worth a grab or are we missing something important?
It is better to take stock of the macro economic scenario and the interest rate expectations in the economy, before taking decision on fixed rate home loans. Falling crude oil prices, contained current account deficit and lower government borrowing has set the stage perfect for gradual fall in interest rates. Though inflation is still worrisome, the bank deposit rates have come down recently in select tenures, offering an early signal that the rates are going to go down from here. If the interest rates are going to go down, why consider fixed rate home loans.
Especially, at a time when there is not much difference between the fixed and floating rate of interest on offer, fixed rate home loans do not make sense. Such fixed rate loans are banks’ strategy to lock in customers at high rate of interest. If you sign up for a fixed interest home loan, you won’t be eligible for a lower rate of interest if the interest rates fall from here. If the inflation remains benign, over next two years, one can expect at least 100 basis or one percentage point fall in interest rates. If you stick to your floating rate of interest home loan now, you may still save some money. If your home loan company or bank does not offer your lower rate, you can switch to another home loan in CY2015.
Fixed rate of interest loans for time being are to be avoided. These loans though claim to be offering fixed rate throughout the loan tenure, there is a reset clause at the end of three years or five years, which in a way enables bank to reprice the loan or put simply – change the interest rate on the home loan. Also when a customer forecloses the fixed interest home loan, bank can ask for prepayment charges, which is not the case in case of floating rate home loan. This means that the entry into a fixed interest loan may appear smooth, however the exit wont.
Looking at the merits and demerits of fixed rate home loans, one can say that there is not much incentive to for fixed rate home loans now. It is better to stick to ongoing floating rate interest rates and enjoy the downward movement in interest rates. Keep repaying your home loan on time and maintain your credit score. When interest rates bottom out, your credit score will help you to get into a fixed rate home loan. A good credit score, typically more than 750, is an essential qualification criterion to get a home loan on favourable terms. It is time to keep cool and keep a track of your credit score and the interest rate movements.