Cut in home loan interest rates as well as rate cuts by the RBI benefit the end user for sure. If home loan interest rates go down, that benefits and encourages the customers of lower, middle and upper-middle segment to buy a home. Instead of paying monthly rent, it’s better to pay EMIs and become the owner of your home. The government with the help of RBI is taking a certain initiative to remove the difficulty in buying a house. Various banks had already slashed their rates to 9.1%. The interest rates may further be lowered to encourage people to buy their own home.

Will the interest rate on home loan go down further?

I expect interest rates on unsecured loans to remain unchanged. There may be minor reductions in home loan rates once the CRR constraint is withdrawn. But, it is likely to be few and far between. However, I do expect a rate cut in the next policy meet and this may encourage banks to reduce lending rates.

How does one choose between floating rate and fixed rate?

The decision to choose between fixed and floating rate of interest depends on the interest rate environment at the time of taking the loan. Given the current scenario, I would recommend consumers to opt for floating rate of interest. However, your EMI payout may sharply increase in the event of a sharp increase in the interest rates.

Fixed rates would be a better option if the existing interest rates are relatively low and you expect it to rise in the near future. Opt for this if you prefer certainty and security over market fluctuations.

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Borrowers may opt for MCLR-based home loans in the existing interest rate scenario as it’ll ensure quicker response from banks in terms of rate changes. RBI has mandated banks to set at least 5 MCLR rates (from overnight to 1yr). Consumers should consider opting for the bank that offers lowest tenure, given that the rates are expected to go down further during the next policy meet. You can visit platforms like Paisabazaar.com to compare loan pricing before switching.

What would be the impact of rate cut on the economy?

Rate cut by banks reduces the cost of credit for borrowers, encouraging them to take fresh loans to finance greater spending and investment. Thus, lower rates will encourage businesses to incur higher capital expenditure and increase demand for capital goods and commodities.

Lower interest rate also reduces interest payout for the existing retail borrowers and this leaves them with greater disposable income for spending on consumer products. The increased demand for both consumer and capital goods is expected to push the overall GDP growth rate upwards.

However, the increasing demand for capital and consumer goods may also push up the rate of inflation. Thus, rate cuts should coincide with increased production of goods and services to keep inflation under control.

(The author is CEO & Co-founder, Paisabazaar.com)