Fixed Loan vs Floating Loan: The Reserve Bank raised the repo rate by 40 basis points this month to control inflation. The sudden decision by the Reserve Bank’s Monetary Policy Committee (MPC) came as a shock to everyone.
Previously, most economists expected interest rates to rise. But their prediction was that the hike would not happen before June 2022.
The RBI attributed the rise to inflation. Retail inflation rose to a 17-month low of 6.95 percent in March 2022.
At the same time, headline inflation hit a four-month low of 14.55 per cent. One year earlier, it was 7.89 per cent in the same month, March 2021.
The cost of borrowing increased
Following the move by the Reserve Bank, most banks have raised interest rates on loans. Thus the interest rates on loans have increased. This is likely to increase further in the coming months. This increase will have a significant impact on the price of most small loans.
As far as home loans are concerned, the real estate market is likely to pick up due to the rise in interest rates. This market has been stable for the last three years. No growth was seen in this.
Property prices such as house and land were low before the corona epidemic and during the corona epidemic. Real estate companies had more reserves.
Customers were also not in the mood to buy property. Due to this, most of the builders were engaged in selling the remaining houses at very low prices.
The global supply chain has since suffered as a result of the Russia-Ukraine war. Due to this, the price of cement and steel has increased by 6-8 per cent. In a situation like this, builders have no choice but to place the burden on customers.
Interest rates will continue to rise
In the future, the Reserve Bank may raise interest rates further to control inflation. In addition, action can be taken to reduce cash flow from the market.
In such a situation, it is important for home loan borrowers to understand whether it is right to opt for a fixed loan or a fixed interest rate (floating interest rate).
Fixed loan or floating loan?
As interest rates rise, the likelihood of these declining in the future is slim. It would be wise for both new and old customers to opt for a fixed interest rate instead of floating.
This not only reduces the EMI but also saves a considerable amount of interest on long-term interest payments.
However, in the present era, it will be difficult to get a loan at a fixed rate in the long run. When inflation comes under control, customers can convert a fixed rate to a floating rate.
It is best to do this only after you understand the difference between the two at the time, i.e. you should first examine whether the customer benefits or lose by changing the credit ratio system and then change it.
In this way the calculation can be understood
This can be well understood with the example of 10 year and 20 year loan of Rs 30 lakh. Home loan borrowers for 10 years at the current repo-linked floating rate will have to pay an additional Rs 1,449 as EMI if interest rates increase after 1 year.
At the same time they have to pay an additional interest of Rs 1,73,903 for the entire loan period. Floating rates were most effective when interest rates were low due to infection.
Let us now understand the difference between floating and fixed rates for 20 year loans. For this period, you will have to pay an additional EMI of Rs 1,717 after 1 year at the floating rate.
At the same time pay Rs 4,12,110 more as interest. In this era of rising interest rates, it would be wise to opt for a fixed rate instead of floating interest.