The interest rates have been increasing steadily . Thanks to the inflation rate, interest rates are not showing any signs of cooling down. The Reserve bank of India (RBI) is doing all it can to bring down the inflation rate and control the inflationary pressures. So far, the success rate has not been much. The RBI has to balance its measures with growth. It has been increasing the key rates - repo and reverse repo rates - in order to control the inflationary conditions. As a result of these measures , banks have been increasing the home loan interest rates. The lending rates, in fact, have been increasing on all kinds of loans - personal, vehicle, and housing loans. The increasing interest rates have resulted in increases in EMIs. The question that now arises is whether it is a good time to lock-in to a fixed interest rate. Considering the past trend of continuous interest rate increases , will it makes sense to opt for a fixed rate is the question many prospective borrowers ask. In case of an increasing interest rate scenario, borrowers on a floating interest rate scheme are always at a disadvantage. The interest rate on the loan is increased as soon as the bank decides to increase its interest rates. Therefore, the dilemma faced by many borrowers is whether to opt for a fixed rate loan or a floating rate loan in the present scenario . This becomes all the more important because the quantum of a home loan is mostly large and the tenure long. In a fixed rate of interest scheme, the rate of interest is decided before-hand - at the time of taking the loan. Ideally, the rate should remain the same through the tenure of the loan irrespective of the market rates. In case the interest rates go up, the borrower should still pay the rate of interest fixed at the time of availing the loan. In case the interest rates go down, the borrower loses as he has to pay a higher interest as compared to the market rates. However, as of now, there are no fixed rate loans for the entire term. The banks incorporate a reset clause. This clause gives the bank the right to increase the interest rate in case the market interest rates increase drastically. In case of a floating rate loan, the rate of interest is linked to the market rate or a benchmark rate - the base lending rate of the bank. The rate of interest varies directly with the market rates of interest. In case the market interest rates go down, the cost of borrowing for the borrower also goes down. In case the market rates go up, the cost of borrowing for the borrower also goes up. Thus, the borrower floats along with the market rates of interest and has to constantly monitor the market movements. In the present scenario, a borrower is unsure about which loan to choose. There is some risk involved in both the cases, and the borrower needs to take a conscious decision. The present increase in interest rates has been due to the increase in inflation rate. Once the inflation rate comes under control, the interest rates have to come down too. For the growth of the economy, high interest rates cannot be sustained for long. Although no timeframe can be fixed, the measures initiated to control inflation should start showing results shortly. This will result in a reduction in interest rates. As such, it does not make sense for a home loan borrower to lock-in to a fixed interest rate loan. It would be better to opt for a floating rate loan. The interest rates have almost peaked. Although another increase could happen in the near term, in the long run the rates are bound to come down.
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