Interest Rates for Home Loans are undoubtedly the most important parameter for a consumer while considering his loan agreement. The country's housing loan segment has seen various fluctuations in interest rates over the past two years. Home loan seekers have faced dramatic interest rate changes caused by variations in economic parameters. The Reserve Bank of India (RBI) has played a vital role in influencing home loan rates through its monetary policy tools such as Cash Reserve Ratio (CRR), Repo rate, Bank rate, etc.
The Monetary policy and its effect
CRR is a mandatory cash requirement of banks with the RBI and is fixed as a percentage of total deposits. If the CRR is reduced, more money if left to chase the same number of borrowers and interest rates come down. Similarly if CRR is increased, money supply in the economy declines and interest rates rise.
Bank rate is the minimum rate at which the central bank provides loans to the commercial banks. It is also called the discount rate. Usually, an increase in bank rate results in commercial banks increasing their lending rates. Changes in bank rate affect credit creation by banks through altering the cost of credit. Bank rate is directly related to the interest rates.
Repo rate is the short term lending rate of RBI to commercial banks. A hike in the repo rate raises the interest rates charged by the banks and vice-versa.
Floating or Fixed
Home loans are offered in floating rates and fixed rates that often leave home loan seekers in a dilemma. This is because many of them do not know the exact nature of differentiation between fixed rates and floating rates.
Fixed rates home loans are loans available with a fixed rate of interest for a given period of time such as 3 years, 5 years and so on. While floating rates home loans are linked to the prevailing market rate of interest and are therefore subject to change at periodical intervals. Typically, a floating rate is brought up for review once every three months. However, the time period can differ across banks and housing finance companies (HFCs).
A Historic Perspective
The past two years have witnessed huge variations in home loan interest rates. In fact in the year 2007, interest rates fluctuated quite often. The year started with revision of interest rates in the upward direction but somewhere between August and September the fluctuating trend emerged.