Do you need an Umbrella now?

“Interest rates peaking!!!” “Inflation still high, Interest rates may go up further “. All of us have been subjected to these conflicting headlines often on the same day and sometimes even on the same page of the newspaper. Economists just cannot seem to make up their minds on the immediate direction of interest rates, reminding one of the famous quips from President Truman that he wanted only one handed economists.

Whilst one can quibble about the immediate outlook on interest rates (RBI’s tone is still hawkish on increasing rates unless inflation comes under control) there is more or less unanimity on that we are close to the peak of this interest rate cycle if not already there.
One big indicator of this unanimity in thinking is the rush by banks and housing finance companies to offer Dual Rate home loans where interest rates remain fixed for a period of 1-5 years and become floating thereafter.

Going one step further Axis bank now offers fixed interest for the entire 20 years @ 11.75%. In all cases the partial or full security of fixed rates comes at a price – the interest rates are higher than if you were to take a regular floating rate loan from the same lender.
Mark Twain has said that “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” If the bankers are rushing to offer you the umbrella (of fixed interest rates) you can be sure that it has either already stopped raining or will soon do so.

So do you really need the Umbrella?

Well if you are the kind of person who cannot be bothered to look up every once in a while to see if it is likely to start raining and take protective action accordingly, then it may not be a bad idea to take that umbrella today even if it is fairly expensive. But if you can be even a little attentive then you can get protection when it is needed rather than start paying for unwanted protection from today.

However if protection at any cost is your mantra then you might as well take the more expensive full protection (20 year fixed rates)where the protection is likely to come in handy at least a couple of times over that period rather than a relatively less expensive 3 year umbrella , where it might not even rain. A much better idea of course is to not buy an expensive protection which is unlikely to be used and instead pay a little attention to what is going on and buy it when it is likely to be more cost effective.

After all with the deepening and development of our money and debt markets the cost of the umbrella may actually fall in the future. So ideally be a smart and aware consumer and don’t pay for unwanted protection.
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