The Hindu Business Line : Fixed or floating?

`Is there more room for interest rates to fall?' is a question nagging most borrowers and one most bankers prefer not to answer. Poornima Mohandas surveys the scene.

HOME loan borrowers today are a confused lot. Most of them do not know whether to go in for a fixed rate home loan or a floating rate one.

It's a view that Mr Suresh Menon, General Manager (Mumbai Region) of HDFC, the market leader with over 35 per cent market share, agrees with.

Earlier, about 90 per cent of the housing finance company's customers had opted for the floating rate option, with herd-like perceptions that interest rates would go down further. At present, customers seem anxious about whether or not to lock into today's interest rates. Will the rates go down further is a nagging question on every home loan borrower's mind.

With alluring home loan offers available in the market, many bankers now advocate and would personally choose a fixed rate housing loan over a floating rate one.

For the risk-averse customer, as is the average Indian one, provided he is not too greedy, it would make better sense to go for a 20-year fixed rate loan today at 7.5-8 per cent since it's anybody's guess where interest rates are headed over the next 20 years.

There are various reasons being cited for interest rates on home loans to go up, such as the higher-than-expected delinquency rates in the housing sector, possible pick-up in demand for bank funds and signs of international interest rates strengthening. The central banks of England and Australia recently lifted key interest rates in their respective countries.

However, the general perception on interest rates in the Indian financial world remains that "there are no immediate triggers for interest rates to go down further and remote chances of a hardening even in the event of rupee credit off-take, given the tremendous liquidity in the system." "Is there more room for interest rates to fall?" is a question most bankers prefer not to answer.

The existing customer of floating rate loans should be quick in acting and switching over to fixed rates in the slightest hint of interest rates nudging up in the country, but are customers so well-informed and clued in? This switch will come at a fee averaging 0.50 per cent of the outstanding balance amount.

"The rates in the market today are the best-ever. Even a 20-year loan is available at a fixed interest rate of 8 per cent. At this rate, it makes good sense to lock into a fixed rate loan since even if interest rates fall any further it would only be by a notch while a rise could be much sharper and more painful on the borrower's pocket. A war or any dramatic changes in world economy could change the face of the global economy and Indian interest rates in the next 20 years," said an experienced private sector banker.

Even economists cannot make 20-year forecasts on the global economy, let alone on interest rates.

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