Oil price hike to hit home loan rate?

You are probably aware of the sharp rise in crude oil prices. You have also probably read of how 'dangerous' this can be for the economy and how it could 'sting' your investments. But are you sure you know how this rise will affect you? In this note we explain how the hardening of oil prices impacts you.

We avoid, for now, getting into a discussion on whether inflation will rise in the first place. The jury is out to deal with that topic. On our part, we unravel exactly what the rise in oil prices means to you as an individual and investor.

Home loans
At this stage it would be presumptuous and even simplistic to conclude that a long-standing oil crisis could eventually lead to a rise in home loan rates.

The home loan rate industry is very competitive and a rise in loan rates is not as imminent as it appears. Home loan companies could decide to compromise on their profit margins and keep home loan rates at lower levels. So a rise in home loan rates is not as apparent as it may seem.

But in case of a sustained rise in interest rates (possibly due to inflation), companies could at some point react by raising rates.

So if you can bear near term risk, floating rate home loans are still a good option (in any case the rate offered is lower by about 1 per cent as compared to fixed rate loans). If you cannot take any additional risk, stick to the fixed rate type of loan.

Debt funds
As we have explained, if inflation does become a problem due to the oil crisis and increased spending/investment by businesses then bond yields could rise (bond prices could fall, resulting in losses for debt fund investors). If this happens then longer-dated bonds could see sharper erosion in their value than shorter-dated paper. Therefore, it makes sense for investors to remain invested in short-term mutual funds, especially of the floating rate variety.

Floating rate funds: Head above water

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