Due to rising interest rates, and fear of paying higher EMIs and with the advent of floating interest rate loans in the market, most home loan borrowers are under a great amount of stress since they are unable to decide whether they can support higher EMI payments or increase their loan tenures.
Even a 0.25% increase in the interest rate will make your EMI payments heavier on your finances.Many economists predict that, interest rates are likely to hike again in the near future but once it has increased, they remain stable for quite some time.
So, now you may be thinking of going for a fixed rate option. But if the interest on such loans under this scheme carry 14% interest, it may be 4.5% more than the floating rate. Most banks are not very keen to hand out loans under fixed interest rates, however, if they do, they insert a clause in the agreement which will enable them to change the interest rates if the PLR rate exceeds its maximum limit as stipulated by the bank.
A fixed and floating option is the new scheme in the market. Under this scheme, the teaser loan is offered at a fixed rate for a few years and later shift to the floating rate. For example, SBI’s fixed-cum-floating rate plan charges 8% on your home loan in the first year and 9% for the second and third year, respectively. Similarly, HDFC charges you a fixed interest rate of 8.5% till March 31, 2011, and 9.5% for the period between April 1, 2011 and March 31, 2012. With interest rates on an upswing, these loans protect you from volatile conditions for at least for 18-36 months.
If you are opting for a floating rate, make sure that even a 1% increase in the rate, should not affect your EMI payments.
But before you finalize on any loan, make sure that the EMI value should not exceed a maximum limit of 50% of your take home salary. Try diverting your finances towards reasonable investments so that you can have a surplus in hand in future. Also, cut down on your expenses, so that you can pool in finance easily and quickly to pre pay your loan as soon as possible.