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Interest rates may go up as EMI reduces

While the real estate market is looking upwards with many people purchasing property, the home loans division is seeing a positive trend too. Securing a home loan is the most commonly used method to pay up for the property purchased. The tenure of a home loan usually spans from 10 to 20 years depending on the amount of loan procured. The Reserve Bank has presented a proposal to treat home and car loans in the same manner as other loans by bringing the EMI down while extending the overall tenure. The proposal by the KK Vohra committee suggests that like other loans, home loans too should have a longer tenure, with lower EMI's and probably slightly higher interest rates. The ideal plan is to extend the tenure on home loans while keeping the rate of interest at a fixed rate. The recommendation states the cap on tenure to be set for 30 years. Another clause attached to the proposed suggestion would prevent customers from switching to a lower interest rate in between the tenure, which is an option that is currently exercised by many home loan customers with a view to decreasing their financial burden. To this effect, it is suggested that home loans would come with a caveat that the interest rate cannot change in between the loan tenure. This proposal would leave customers coughing up a higher rate of interest; however the monthly EMI's would reduce. Other recommendations put up by the committee include

  • Banks should have a provision for floating interest rates for home loans with a tenure of 7-10 years
  • Banks should offer both fixed and floating ROI for all loans
  • Interest on pre-payment of fixed ROI home loans to continue, however a separate provision could be made for the remaining duration of the loan

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15 Dec 2012

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