Housing loan: To float or not?

Have you opted for a housing loan with floating rate? It is time to switch to fixed rate.

Look at Rajiv Mehta. In the last two years, he transferred his outstanding housing loan to three different banks. With each transfer, he managed to shave off a few percentage points from his interest rate. Now, he is happily settled with floating rate of interest. He is hoping to see the interest dip a bit this year, too. Will his lucky run continue this year?

There are many like Mehta, who made most of the interest rate reduction in the past two years. Their debt fund investments were yielding phenomenal returns. Housing finance companies were slashing interest rates. They even had the option of floating rates, which will automatically reduce interest on their outstanding housing loans. All thanks to a declining interest rate regime.

However, there are some portends which do not look good for Mehta and his ilk. It seems, for the first time in the last two years, the interest rates are poised to go up. That is, floaters like Mehta may actually see that the interest rate on their outstanding loan going up. Something most floating rate devotees discounted while switching to floating rates. Is it likely?

In fact, the trend indicates that most Mehtas think so. In fact, most of the new loan seekers are opting for fixed rate. “Most of our new customers are asking for fixed rate. Many people have also shifted to fixed rate from floating rate,” says Bhakha Vatchalam, chief manager, Can Housing Finance.

To begin with, Allen Greenspan, the man who controls not just the US interest rate but also creates ripples around the world, has indicated that the US Federal Reserve may soon hike rates. Worse, global rates have already shown signs of firming up. Can India be an exception?

Closer home things are not any different at all. The yield on secondary market for bonds has firmed up and has been range-bound for sometime. And the demand for credit from the manufacturing sector is poised to takeoff anytime. After all, growing industry need more investments. These factors clearly indicate that there is something brewing on the rate front.

“As of now, the market is clueless about the future course of rates. A real increase in demand for credit or inflationary pressure will dictate the future course of action,” says a debt fund manager. And the parliamentary election has also contributed to the confusion. No wonder, the rates are range-bound these days. However, that would not help us taking a call on rates.

Have interest rates bottomed out in India? “Chances of any significant changes in rates are unlikely. The rates have more or less reached their bottom,” says a senior official at a housing finance company. “We think the rates have bottomed out,” says Sanjeet Singh, fixed income analyst, I Sec. “There is no likelihood of rate rethink in the next six to nine months. We don’t expect any hikes in rates in the near term.” That means that the rates may stay put and floaters don’t have to shell out more on your housing loan for the time being.

What are the chances of rates firming up? After all, Indian rates have to align with global rates in the long run. “The domestic economy is growing and there are already signs of inflationary build up. These factors clearly shows that the rates will go up,” says Singh. However, he rules out any changes in rates before six to nine months. So, watch out for these signals. If you read that inflation is inching up and there is huge increase in demand for credit from industry, be sure that the rates are ready to take off.

The obvious question that follows is what are the chances of any significant increase in interest rates. Good news is that not many people believe that there would be any steep hike in rates. The reason: we are a growing economy and the Reserve Bank of India will keep the rates low to fuel growth in the economy. In short, India simply cannot afford higher interest rate.

Finally, what should be your strategy? Should you revert to fixed rate? Or should you stay with floating rate loans for the time being? Here is what experts want you to do. If you are just about to avail of a housing loan, opt for a fixed rate. This is because the chances of any further reduction in rates look unlikely. And by option for a floating rate loan, you are exposing yourself to the risk of an upturn unnecessary. Remember, the idea behind floating rate is to benefit from the reduction in rates. The same rule applies to those who have fixed rate loans. Stay put.

Second, if you have floating rate loan, you have two choices. Straight head to your HFC and change to a fixed rate or do it after six months. The first option is ideal as no prediction is foolproof. However, one thing is certain. You don’t stand to gain much from floating rates anymore, whereas the risk of upward movement is very much there.

The rates may go up after sometime. When and by how many points is anybody’s guess. Don’t bank on the prediction that the increase will not significant. Even a percentage point revision can be sizeable if you have a large outstanding.