Home Loan Dilemma: Floating Or Fixed Rate Post RBI’s Rate Hike Pause?

With the Reserve Bank of India deciding to keep the repo rate steady at 6.5 percent, borrowers face a dilemma between fixed and floating-rate home loans.

The current state of the housing market is expected to remain unchanged, given the decision of the Reserve Bank of India (RBI) to maintain the repo rate at 6.5 percent. The recent 18-month low in inflation sets the stage for potential future reductions in the repo rate during the upcoming Monetary Policy Committee sessions. By maintaining the repo rate at 6.5 percent, the RBI aims to achieve a headline inflation rate of 4 percent, which has wide-ranging effects on various sectors such as fixed investment instruments, home loans, and real estate.

Floating Rate vs Fixed Rate Loans: Borrowers' Dilemma

The pause in rate hikes presents a complex situation for borrowers. Opting for a fixed-rate home loan means committing to a higher interest rate for a longer period. Conversely, choosing a floating-rate home loan exposes borrowers to the possibility of future rate hikes, potentially making their decision more costly compared to fixed-rate borrowers.

However, with repo rates remaining stable, most banks presently offer single-digit interest rates ranging from 8.7 percent to 9.65 percent. Financial advisors suggest that existing borrowers might find it wiser to retain their floating-rate loans, considering the potential for future repo rate cuts.

However, the impact of El Nino and the increase in the Minimum Support Price (MSP) for food crops could contribute to additional inflationary pressures. Consequently, the central bank, which has already forecasted a 5.1 percent inflation rate for FY24, may implement further rate hikes.

Industry Response

The RBI's decision to maintain the repo rates has been met with approval from the housing industry. Unchanged home loan interests and EMIs are expected to provide a welcome stimulus to the sector, as it signals a boost in consumer confidence and stability in home loan interest rates. However, industry leaders advise prospective borrowers to thoroughly evaluate the implications of fixed or floating-rate loans on their individual financial situations. While fixed-rate loans offer a consistent repayment amount, they are usually associated with a higher initial cost. Conversely, floating-rate loans offer greater flexibility, but may lead to increased EMIs if interest rates rise.

Navigating The Home Loan Landscape

The choice between a fixed or floating-rate home loan ultimately depends on the borrower’s financial circumstances, their outlook on future rate changes, and risk tolerance. For homeowners who anticipate ongoing rate hikes and are comfortable with current payment levels, opting for a fixed-rate home loan may be the best decision. This option offers protection against future rate increases and guarantees a consistent monthly payment. Conversely, if homeowners anticipate stable or decreasing rates, floating-rate home loans can offer potential savings, although there is a risk of higher payments if rates unexpectedly rise.