How to decide between a fixed interest and floating interest rate home loan – some tips and pointers
Now that you have decided that you need to take a home loan to buy your dream house, the next query is about selecting the bank from which to take a loan, as well as whether you should go in for a fixed vs. floating interest home loan. I have some friends who have taken a floating interest loan, and others who have taken a fixed interest loan, and there is no major dissatisfaction levels that I have seen in either, so basically, it is more about your comfort level with either type of loan. Let me outline some of the parameters / factors that could help you decide:
- In a fixed interest loan, like the term fixed means, the interest rate will remain the same during the course of the loan even if the Prime Lending Rate changes. However, as was in the past 2 years, this is not totally true, the banks / financial institutions did put into the small print that in some situations, they could even change the rate of the fixed interest loan (something that scared and puzzled a large section of the borrowers); so keep this in mind
- In a floating interest loan, the loan is benchmarked to some interest rate, which could be an internal benchmark, or even the Prime Lending Rate (PLR). When either the rate increases or decreases, the bank will typically adjust the time period left in the loan and keep the EMI constant (since you might have given post-dated checks, or signed an ECS agreement of a certain amount). You can request them to change the EMI amount.
- When the interest rates are at historic lows, that is a time when people try to lock themselves into a fixed interest rate regime so that they can avail the benefit even when the interest rates rise (although if the interest rates rise too much, the banks will reset the interest rate)
- People who tend to more conservative fiscally do no find the idea of a changing EMI amount or a changing loan tenure comfortable, and hence try to ensure that they get the required stability in a fixed interest rate loan
- When you compare fixed interest rates with floating interest rates, it is generally found that you end up paying for this stability, with the fixed interest rate working out to be more than the floating interest rate
- When you have a floating interest rate loan, then you should be prepared for the uncertainty, such that an increase in your EMI or loan tenure through an increase in the interest rate not causing your personal finances to be in jeopardy
In the end, you need to take a call. Evaluate your options, calculate the effective rates and do some personal calculations of what would be the impact of changes and then decide which option you want to take.