When you decide to take a home loan confusion arises in mind which interest rate you should opt for. Most of the time the decision is taken in favor of fixed interest rate as it does not change with the change in the interest rate in the market, while the floating interest rate changes.
But now you can decide for floating interest rates earlier which used to upset your budget because of the increased evaluated monthly installment (EMI).
Soon MCX SX a subsidiary of Multi Commodity Exchange of India Ltd (MCX) operating under the regulatory framework of Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI), will be launching a tool in the form of interest rate futures (IRF) which will enable the home loan borrowers to alleviate the risks of interest rate volatility.
However on investing only 2.5 per cent (margin money) of the home loan amount in IRF, the borrower will be able to earn that much money in the futures market which he will loose whenever there is increase in EMIs.
The MCX SX is waiting for the approval from the regulator for the launch of IRF. According to MCX SX officials globally IRFs is having a share of more than 70 per cent in the overall futures market.
It becomes easy for a home loan borrower to evade the risk of interest rate instability after investing in IRF. For example if you take a home loan of Rs 20 lakhs for a period of 15 year and bank charges interest rate of nine per cent, then the EMI calculated will amount to Rs 20,285.
So, if the interest rate increases by one per cent, the EMI will increase to Rs 21,492 which will add a yearly burden of Rs 14,500. Therefore if you invest 2.5 per cent of 20 lakhs i.e., Rs 50,000 in the interest rate futures then it would recompense the loss arise with the increase in the EMI.
This means that you will earn around Rs 14,500 in a year. Thus you will repay your home loan at the interest rate of nine per cent.
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