These home loans could work out cheaper!

Harsh Roongta says: I strongly recommend a home loan with a transparent floating rate of interest. Here's why.

A true-blue 'fixed' interest rate is one that remains fixed during the entire tenure of the loan. It should be such that the bank does not have the power to change the rate under any circumstances. Very few banks offer actual true-blue fixed interest rates. Unlike the 'fixed' interest rates on the home loans, the bank can change the floating rates.

As a consumer, it makes sense to opt for 'transparent floating' interests on home loans. This essentially means that the interest rates should move downward when general interest rates register a fall and move upward when the general interest rates move up.

To check if your bank offers a 'transparent floating rate of interest' on home loans, request for the bank's records of benchmark rates in 2002 and 2003. This data will help you gauge whether the bank has actually passed on the benefit of reduced rates to its existing consumers at the time when the lending rates had fallen.

My choice of transparent floating rate is based on certain criteria:

1. These loans are at least 2% cheaper than a comparative tenure fixed rate home loan. There is safety in numbers. Over 90% of the home loan consumers opt for floating rate loans.

This is a potent and large community, which the politicians can ill afford to ignore (witness the imbroglio when the PSU banks tried to raise their home loan rates) and hence a dramatic increase in rates in a short time is very unlikely.

2. You also get the benefit of reducing interest rates as (not if) and when the interest rate cycle turns and commences on its downward journey. Even if the interest rates rise, in the interim as long as they do not rise above the 1 % differential, you are still a net gainer.

I recommend you go for a transparent floating rate loan unless, you want to play it completely safe and are willing to pay the premium (in terms of high interest rates) for such safety. In any case, signing a fixed rate loan, that is not a real fixed rate loan-makes no sense whatsoever.

While the interest rates are a deciding factor in taking a home loan, we must remember that this is not a one-time decision. You have the option to shift the loan at a later date from one bank to another for lower interest rate.

Quick tip: 

Be a vigilant consumer even if you have opted for a fixed rate of interest. As a matter of practice, assess how the markets have moved in a six-month period and consider the costs and benefits of changing your decision.

SAFA rules

I presume the SAFA rules that you mention relates to the South Asian Federation of Accountants. There is no likely connection between a bank's rate hike and SAFA rules.

apnaloan.com is a guide to the best home loans in India.