At the time of availing Home Loan, the biggest dilemma is to select Floating vs Fixed Interest Rate. Any wrong decision can put big hole in your pocket. Normally, risk averse customers opt for Fixed Interest Rate. If you decide to switch loan from Floating to Fixed during loan tenure then you might need to shell out charges upto 1% of outstanding loan amount. Let’s find out pros and cons of both to solve this riddle of Floating vs Fixed Interest Rate Home Loan
Floating Interest Rate Home Loan
Between Floating vs Fixed Interest Rate, In Floating Home Loan interest rate is linked to Base Rate (Banks) or BPLR / RPLR (Housing Finance Companies). To know more on Base Rate & BPLR, you may CLICK HERE. The interest rate movement is linked to current economic conditions in country predominantly inflation and growth factor. High Inflation means High Interest Rates thus Low Growth Rate. Inverse of this is also true. The Floating Interest Rate is dependent on RBI policies & cost of fund i.e. at what cost Bank / HFC is acquiring funds for lending. We will understand more on how interest rates are fixed in next article. The Floating Interest Rate equals to Base Rate plus Mark up or BPLR / RPLR minus spread/discount.
(a) Financially most beneficial during low inflation period
(b) Rate of Interest is lower by 1% to 1.5% compared to Fixed Interest Rate at the time of availing loan
(c) No Pre-Payment Penalty on Floating Home Loan
(d) Option to lower interest rate (Reducing Mark up or Increasing Discount) in future by paying conversion fees
(a) Highly Volatile: Any change in Base rate will result in either higher EMI or increased loan tenure (EMI remains same).
(b) Non Transparent way of calculating Interest Rate
(c) Very high Interest Rate variance of upto 1.5% between various lenders e.g. One lender is providing loan @ 10% & another is providing @ 11.5% whereas loan amount and other factors are same.
(d) Limited options to select lender of choice providing lowest interest rate
Fixed Interest Rate Home Loan
Between Floating vs Fixed Interest Rate, In Fixed Home Loan Interest Rate is fixed for the loan duration. There will be no change in Interest Rate during loan tenure though there is a rider which we will discuss. Your Home Loan will be immune to current economic conditions and you will be paying fixed amount every month as EMI.
(a) Financially most beneficial during high inflation period
(b) Financial Certainty due to stable EMI amount and Loan Tenure. Interest Rate is hedged against any upward movement.
(c) You may select lender of your choice due to least variance in Interest Rates
(d) Suitable for risk averse customers
(a) The biggest disadvantage is that Fixed Interest Rate is actually not fixed. Interest Rate Reset clause in Loan Agreement provide option to lender to revise Interest rate every 3 years or 5 years therefore interest rate is not fixed in true sense.
(b) Pre-Payment / Pre-Closure penalty on Fixed Home Loan. Reason being fixed interest rate is not linked to market rates. Bank’s borrowing cost for Fixed Interest Rate Home Loans is high because of future commitment from customer.
(c) In case interest rates go southwards then customers don’t have any option to lower interest rates even by paying conversion fees.
(d) Interest Rates are higher compared to Floating Interest Rate
In this debate of floating vs fixed interest rate, we have gone through pros & cons of both options. The winner of floating vs fixed interest rate discussion is Floating Interest Rate. Reason being comparatively lower interest rate, flexibility of reducing interest rate and waiver of pre-payment penalty. Most of the home loans in india are pre-closed within 8 years therefore if you opt for fixed interest home loan then for sure you will be paying penalty. Moreover in floating vs fixed interest rate options, you can reduce interest rates only in floating interest rate home loan and at the time of availing Home Loan Interest Rate is lower. 90% loans sanctioned in India are Floating Interest Rate Home Loans. As i mentioned that if you are risk averse then between Floating vs Fixed Interest Rate, the best option for you is Fixed Interest Rate.
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