Fix now, float later

PERSONAL FINANCE: For a home loan, lock yourself at a fixed rate now, since you can opt for a floating rate later.

Sanjay Kumar got a Rs 15-lakh housing loan sanctioned in December 2005. A floating interest rate of 8 per cent suited him just fine; after all, floating rates were in vogue, weren't they "" variable rates that bob up and down along with current market conditions?

If Kumar had been reading economic trends carefully, he would've known that floating rates were in vogue during the years of declining interest rates. But as business revives and the investment demand for money perks up, rates start rising too. And so they did, too.

Four months on, by the time Kumar zeroed in on a house he wanted to buy and needed the disbursement of funds, he was shocked to be told by his banker that the interest rate he would have to pay was now 9 per cent "" a whole point higher. This meant an increase of Rs 879 on his equal monthly instalment (EMI).

Okay, he told himself "" he wanted the house. But he remains unnerved by the very thought of another rise.

Kumar's best bet is to steel his nerves: rates are on the rise. The sensible thing to do for any new loan seeker, therefore, is to opt for a regular old fixed rate loan. This would cap your interest outgo even if it means 1.25 points higher interest than the floating rate applicable now. If 10.25 per cent looks dreadfully high, think of the days of 16-18-per cent loans (without tax breaks too).

Moreover, bankers see floating rates going up to the 11-per cent region in just six months, and given the trends, there's no saying how much higher they go.

After all, you can always switch over to a floating rate if and when interest rates peak and start declining again. Home loan rates had hit the rock-bottom level of 7.5 per cent floating and 8 per cent fixed three years back. This had enticed many home buyers. Some observers consider it unlikely that rates will go that low again in the foreseeable future. So don't wait for it.

In any case, if you have your heart set on your dream house or condominium apartment, you should look forward to a higher income as a way to finance an extra bit of EMI. Trends indicate that incomes in India are headed sharply higher too.

What's more, a wisely chosen home "" say, in an area of future preference "" may also make a good long-term investment. Value appreciation may then outweigh the EMI increase.