Home loan: era to move to base rate

The interest rates in the country have started firming up with an uptrend in the growth rate of the economy. Even the Reserve Bank of India (RBI) is increasing the policy rates, which would lead to a rise in the interest rates, to contain the rising inflation in the country.

On July 2, in order to contain the price rise, the RBI increased its repo rate – the rate at which it lends short-term funds to banks – by a quarter of a percentage point to 5.50 percent, amidst prevailing tight liquidity conditions in the banking sector. This is likely to push up the interest rates on all loans including home and car loans.

Interest rates may push up

Economists and bankers feel that as the inflation continues to rise, the RBI may tighten the rates further on July 27, when it will review its credit policy. This may force banks to revise their interest rates upwards. However, this will not immediately affect existing customers, even if they have borrowed their home loan at the floating rate of interest, provided they have shifted the benchmarks to fix their home loan rates to base rates.

According to the RBI guidelines, all banks announced their respective fixed rates from July 1, 2010, which will act as their benchmark rates for their future loans including home loans given at variable rates of interest. However, for existing customers who have borrowed prior to July 1, 2010, the earlier benchmark – prime lending rate (PLR) – will remain operational.

Interest rates on home loans will remain unchanged

As the base rates are fixed for three months and can now be changed only after September 30, the interest rates on home loan and other variable interest rate loans will remain unchanged till then. But, the earlier benchmark rates like PLRs can be changed anytime, when the interest rates in the markets firm up.

For more : Home Loan – move to base rate