Ask Mint | Today, we may be at the peak of the interest rate cycle

Ask Mint | Today, we may be at the peak of the interest rate cycle

To help readers keep pace with what’s happening in the real estate sector, Mint’s Q&A appears every other Monday.

I am planning to buy an existing flat for which the owner is still under hypothecation with the bank. The current value of the flat is approximately Rs20 lakh. But the loan he has from the bank is only Rs10 lakh. If I do a loan transfer from the existing bank to a new bank, will the new banker give a loan based on the price at which I am buying the flat or only to the extent of the loan outstanding of the borrower, that is, Rs10 lakh?

The bank will consider the agreement value of the property you are buying and give you the loan accordingly. The outstanding loan of Rs10 lakh of the seller is of no consequence since the property value is Rs20 lakh. However, any bank or lending institution approves the loan amount depending on the repayment capacity of the borrower. At HDFC, for instance, we provide up to 85% of the property value, depending on the repayment capacity.

When I took the loan in 1997, it was at a fixed interest rate but then the interest rate came down and I was advised to convert to a floating interest rate by paying a small fee. I changed it to floating in 2001 and now interest rates are soaring — my EMI (equated monthly instalment) has increased a lot. Is it time to switch back to a fixed rate?

It is very important for a customer to completely understand the concept of a floating rate loan. Please note that housing loans are typically long-term—15 to 20 years—and over this period cyclical movements in interest rates are inevitable. I am sure you would have benefited by converting to floating rates in 2001 as the rate between 1997 and 2001 fell approximately almost 4-5 percentage points. My advice now would be that you should continue with the floating rates as even today floating rates are much lower than the fixed rates. Moreover, today we may be at the peak of the interest rate cycle and hence, as and when interest rates come down, you will stand to benefit.

Renu Sud Karnad is joint managing director, HDFC.

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