Home loans-Fixed Rate Vs Floating Rate-Which is better option
If you are planning to buy a house, you might be a dilemma on whether you want to choose a fixed rate or floating rate for home loans. In the last 2-3 weeks, I got more than 50 comments and messages asking similar question as to Fixed Rate Vs Floating Rate for home loans, which is better option? In this article, I would detail about Home loans-Fixed Rate Vs Floating Rate, their positives, and drawbacks and answer some of the frequently asked questions.
Fixed Rate Home loans
Under fixed rate home loans, an individual need to repay the principal loan and interest in equal installments over the loan tenure. The interest rate is fixed for the period of loan.
Also read: Best Home loans rates in India
a) Positives of Fixed Rate Home Loans
- Rate of interest is fixed for the loan tenure
- Fixed monthly installments (EMI) need to be paid for the period of loan
- Good for individuals who want to make fixed payments so that their monthly budget would not impact.
- Upfront clarity about the installment and interest to be paid during tenure of loan.
b) Drawbacks of Fixed Rate Home Loans
- Fixed rate home loans generally comes 1-2% higher interest rate compared to floating rates.
- When interest rates are reduced, you may not enjoy the low interest rate benefits.
Floating Rate Home loans
Under floating rate home loans, an individual would pay the monthly installments based on the interest rates arrived by base rate plus a floating element. Any change in base rate would change the interest rates of your home loan and it would change your monthly installment/EMI.
a) Positives of Floating Rate Home loans
- These would come with 1-2% cheaper interest rates compared to the fixed rate. Means you would pay less interest if you are taking the loan.
- The interest rate would change due to economic fluctuations and you would always have interest rates which reflect current scenario.
- In long run, interest rates would always fall and thereby you would enjoy paying lower interest rates.
c) Drawbacks of Floating Rate Home Loans
- Major drawback is unequal monthly installments/EMI which you need to pay every month
- One cannot maintain a fixed budget due to these fluctuations.
- Interest rates have been increasing for some time and currently they are at peak. It may take some more time for RBI to take necessary interventions to reduce the base rate. Any such Govt or RBI regulations would impact the floating rate and one need to pay higher interest rates in floating rates.
Fixed Rate Vs Floating rate in home loans – Which is better ?
- One should go for fixed rate when interest rates are expected to go up. This is also a good option where one wants to cap on interest rates and do not want to pay anything higher.
- One should go for floating rate in case interest rates are expected to go down from current level.
- Currently, interest rates are in peak. RBI want to wait for some more time to reduce the base rate which would impact the floating rate interest rates. Under this scenario, one should opt for Floating rate home loans.
Interest rate fluctuates over years – What should be our strategy?
Fixed rate is always higher by 1% to 2% on floating rate. So you should be careful in choosing a fixed rate. If interest rates are peak, do not go for fixed rate. Floating rate home loans are better. However several times, floating interest rates have fallen to less than 8%. In such scenarios, it would be always good to switch to fixed rate home loans. I know couple of my friends who are paying 8% fixed interest home loans where they managed to switch cleverly during such low interest rates.
What are the charges to switch the home loan?
If you want to switch your home loan from fixed rate to floating rate or vice versa, there are some charges involved. You should consider them before you switch the home loan.
a) Processing charges for new loans : Banks or financial institution charges processing charges to process new loans.
b) Pre-closure charges for existing loans : Though there are some banks which are not charging any pre-closure home loan charges, but in case there are any hidden charges, you can check with bank or financial institution and consider them.
c) Switch within bank : You can switch your home loan from fixed to floating rate or vice versa within your bank. Banks would be happy to do this switch as they do not want to leave the customer. You can consider processing charges + any additional hidden charges to arrive the charges involved in the switch.
It would be a good idea to switch from fixed rate to floating rate if the interest rate difference is more than 0.5% as it makes lot of difference in long run. In case floating rate is reduced drastically in future, you can always switch back to fixed rate with such additional switch charges and enjoy fixed EMI’s with lower rate.
Fixed rate for a partial period and floating rate for remaining period-Is it a good option?
Last week, one of the reader asked me this question that he want to take loan from one of the bank/financial institution and they are saying fixed rate for 10 years and floating rate after this and whether this is good option? Since interest rates are at peak level, there are higher chances that the floating rates would come down. Means, you should go for floating rate home loans and not for fixed rate under current scenario.
Conclusion thoughts: Fixed rate Vs Floating rate, both have positives and drawbacks. Each of them would behave differently in fluctuating economies. Under current economic scenario when interest rates are at peak level, there are little chances of interest rates going up. Under such scenario, It would be a good option to consider floating rate home loans.
Readers, what are your views on fixed rate and floating rate home loans. What are your experiences on this? Please do share your views which would help the reader community.
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Home loans-Fixed Rate Vs Floating Rate-Which is better option
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