After big reduction in home loan interest rate should you go for a home loan now?
India's central bank has been continuously reducing its policy rate since January 2015
and has gone for an overall reduction of 1.75% in its Repo Rate, a rate at which
it lends to banks, from 8% to 6.25%. Transmission of any interest rate reduction by RBI to the end users, which are banks' borrowers, happens only when there is sufficient liquidity in the banking system. Lack of liquidity compels banks to compete for short term liquidity to meet their day to day cash requirements. As a result of too many banks chasing the limited liquidity, the short term interest rate increases. Hence, any reduction by the central bank in Repo Rate becomes ineffective. This lack of liquidity in
the banking system was the reason why even after so many reductions in Repo Rate the benefit was not passed on to retail borrowers, who have taken loans like home loan, auto loan, personal loan and so on.
However now with the government's demonetization drive there has been a remarkable surge of liquidity in the banking system as bank are now flooded with low cost deposits in the form of current account and saving account deposits. This is the reason why some of them have already started reducing their lending rate by announcing reduction in their MCLR
(Marginal Cost of Funds based Lending Rate), a benchmark to which interest rate of bank loans are now linked. These interest rate cuts are one of the biggest rate cuts seen in the recent past. It has almost taken the home
loan interest rate to the lowest level seen in last 6 years. Therefore it may make sense
for you to go for a home loan now if you have been waiting to buy your home for
some time.
In case you do not like fluctuation in interest rate and are willing to pay a little premium for a fixed rate home loan then also it may be a right moment for you to go for a fixed rate home loan and lock in the interest rate at prevailing low level. However if you wish to have one of the most competitive interest rates and are not uncomfortable with changes in the interest rate then you may go for a floating rate home loan. It would give you one of the lowest interest rate at any given point of time. If you want best of the both world then going for a hybrid home loan, which offers fixed but lowest interest rate for few initial years and then converts into a floating rate loan, could be a better idea. Hybrid home loans have made a come back with the country's biggest lender SBI offering a new hybrid home loan. Beside the lower interest rate advantage on home loan you would also get some good deals now in property market. There have been news of correction in many property markets due to government demonetisation drive. For an end user this could be an unique opportunity to own a home.
In case you do not like fluctuation in interest rate and are willing to pay a little premium for a fixed rate home loan then also it may be a right moment for you to go for a fixed rate home loan and lock in the interest rate at prevailing low level. However if you wish to have one of the most competitive interest rates and are not uncomfortable with changes in the interest rate then you may go for a floating rate home loan. It would give you one of the lowest interest rate at any given point of time. If you want best of the both world then going for a hybrid home loan, which offers fixed but lowest interest rate for few initial years and then converts into a floating rate loan, could be a better idea. Hybrid home loans have made a come back with the country's biggest lender SBI offering a new hybrid home loan. Beside the lower interest rate advantage on home loan you would also get some good deals now in property market. There have been news of correction in many property markets due to government demonetisation drive. For an end user this could be an unique opportunity to own a home.
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