Your fixed rate of interest may not remain fixed
Several people are happy with their current position because they are not being impacted by the situation affecting the economy.business Updated: Jul 07, 2008 20:19 IST
Several people are happy with their current position because they are not being impacted by the situation affecting the economy.
On one hand inflation has risen quite high and because of this interest rates are also on the upswing. Though the impact of this situation is different for borrowers and depositors, they have to take specific steps to protect their position.
Meanwhile, people who have taken housing loan on fixed rate of interest are keenly watching the goings on.
Nature of interest
A fixed rate of interest is where the rate of interest is fixed and will not change with other changes taking place in the economy. This means that the person who has borrowed the money will have to pay a specific amount of interest for the entire duration of the loan.
This fixes their liability and due to this reason there is some element of surety about amount of repayment. In case there is a fall in the rates after such a loan is taken, then the person will end up paying a higher amount but if the rates rise, then they will be paying a lower amount compared with what they would have to pay otherwise.
Time period clause
When interest rates are rising in the economy, like they are today, then the existing fixed rate home loan borrowers are not being impacted. This surely makes them happy but there is reason for them to worry, because the situation might not remain like this for a long.
The cause for worry is the clause present in fixed rate loans. One of the conditions that deal with the interest rate often says that the rate of interest is fixed for only a certain period of time, say for 3 years. This means that after 3 years, the loan rate can change and there is nothing that the borrower can do about it because he has accepted the conditions by signing the loan form. It can come as a shock when a person finds the fixed rate of interest on housing loan climbing.
Another clause on the loan form says that in case of emergency situations the rate can again change.
What constitutes such a position is not clearly specified and so a sharp rise in the overall rates can be classified under emergency situation and the borrower could find his fixed rate of interest rising when they should not be.