Floating rates a safe option

HOME LOANS

Sameer Nathan (name changed), a young executive with a foreign broadcaster, is a worried man today. His home loan EMI has risen almost 20 per cent since he took a Rs 50 lakh loan in January this year.

The EMI increase of almost Rs 8,500 in absolute terms is now pinching him. Salary hike notwithstanding, the rise in the cost of servicing his home loan is impinging upon his further plans.

What's more worrying is that at current rates Sameer would finally end up paying nearly Rs 1 crore for the house he bought for Rs 55 lakh "" Rs 15 lakh more than what he had initially thought the EMIs for 15 years would add up to.

More interest hike shocks are to come with no signs of the rates having peaked up. Reports of the Reserve Bank of India (RBI) going in for further interest rate increases to ensure "financial stability" (with which he has got nothing to do) make him feel jittery.

And certainly, Sameer is not the only one caught in this spiral of rising interest rates. Like him, many others had stretched themselves to buy large residential properties, as the earlier lower interest rates made buying houses attractive. The EMIs looked manageable and no thought was given to the fact that they were borrowing when the interest rate cycle had turned for certain.

In such situations, every acquaintance has an advice to offer "" ranging from shifting to fixed rate loan to selling off the property and moving to a bit smaller house, but it would not serve the purpose. Shifting to a fixed rate loan would also not be advisable.

The difference between floating and fixed rate loans is anywhere from 1 percentage point to 2 percentage points. In addition, a borrower has to pay a one-time fee for changing over to fixed rate loan. A borrower might end up paying much more by converting his/her loan from floating rate to fixed rate.