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Loans in India May Become Too Expensive, Experts Claim

Those Indian citizens who are trying to fulfill their dream of owning a house through housing loans may have to reassess their budget first since the State Bank of India (SBI) recently announced to increase their rates on housing, mortgage, and other loans.

A Sudden Decision

SBI had revealed that the increase in the housing loans was due to the interest rate on retail deposits. The interest rate of the said payables had increased, together with the Marginal Cost of Funds Lending Rate (MCLR), by up to 20 points. A financial expert from the Mirae Asset Management explains that the increase of interest rate was expected following the country’s financial performance last year. Based on a 2017 report, the liquidity of the lending market has gone down. This prompts the banks to raise their interest to earn more money and profit to keep the lending services of the banks running.

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The Counter-response Against Slow Progression

Aside from the house and mortgage loans, the Bank of India also stated that they’re going to raise their interest rate on Fixed Deposits (FD) due to the following increases of MCLR for the past two months. This is good news for those depositors and investors who can now grow their money more efficiently through FD.

The Bank of India released a statement in hopes of balancing out the interest rate hikes on home loans and mortgage loans. Furthermore, the Bank hopes that this will encourage more depositors to open a deposit account and deposit their money through the banks.

These changes will also encourage the investors to keep their investment on fixed deposit rather than investing in the stock market or mutual funds.

A Gradual Implementation of Interest Hikes

In order to help the investors, depositors, and lenders prepare for the changes in interest rates, the SBI gave a grace period for the banks to implement the changes. The SBI anticipated that the bank investors and depositors may start seeing the higher return of their money from 6-12 months. This is because the new interest rate for fix deposits will only take effect every six months after the FD matures.

The Fund Investors and Borrowers May Need to Prepare For the Impending Interest Rates

Despite the higher interest return rate of FD, a group of borrowers and investors warned the public of the increased interest rates. The increase usually raises an alarm bell to the financial sector since this phenomenon may create a domino effect on different aspects of the economy.

For instance, the high-interest rate will suppress the prices of funds and bonds, which results in the significant decrease of NAVPS. And if the net asset values per share of bonds decrease, so thus the investments of the investors. This spike in the interest rates greatly affects the bond funds. In fact, India’s long-term gilt funds lost about 2.1% of its total net profit during the last 3 months already. And the statistics show that the trend will continue to go downwards.

Finding Alternative Short-Term Investments

Aside from the decline in bond funds, investors also need to take into consideration the volatility of the stock market. This affects the investment in stocks and mutual funds too. If you’re not comfortable with the recent downward trend of long-term funds and investment, Jajoo advised the investors to try out short-term funds instead. Through these funds, you can only invest your money in a short period of time (usually 1-2 years) and the returns are still high and pretty stable. Furthermore, you can always opt to stop your investment after 2-3 years. 

The banks warned that the current 8.25% interest rate may increase up to 8.45%. This will greatly affect your EMI payment for 15 years or so depending on your loan amortization

For those borrowers who wish to acquire a home, mortgage, and other loans, there may be a tough road ahead of you.  You may need to start reassessing your budget because the interest hike will shape your home loans.

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