Ding Dong, “Madam, this is Courier from Bank, for Mr. Sharma, Please Sign here”. Finally, the Loan Application was accepted and that Courier was carrying it. Ever since he got promoted, Mr. Sharma wanted to surprise his wife with a bigger home and thus started looking for a Home Loan. After visiting a few Banks, he was asked for his CIBIL score and certain documentation for his eligibility. He shortlisted the Bank and submitted everything with them. The Bank correspondent, in that courier, requested him to visit for detailed discussion on the disbursal end.
The smile which she was carrying, was flaunting how much happy Mrs. Sharma was after getting that news from him. The day finally came and Mr. & Mrs. Sharma went to the Bank. Mr. Gupta, the Bank correspondent, will explain the whole disbursal mechanism to the couple.
He started with housing loan EMI calculator and told them the exact number of EMIs and Loan Period. The whole discussion came down to one question, Home Loan Interest Rate, whether to go with Floating or Fixed Interest rate. Any kind of Loan, which is long term, is a commitment and choosing between fixed and floating interest rates is usually a tough decision for most of the applicants.
He replied with:
Fixed interest rate is one, which will not change during the period (term) of the loan, irrespective of what rate is in the market. During the early part of the loan tenure the majority of EMIs are used to service the interest and the principal is served in the later parts of the tenure.
It comes with advantages like:
- Interest rate remains fixed irrespective of market conditions, i.e. it won’t rise even if market goes in direction of rising
- It is excellent for families good at budgeting and wants a fixed monthly repayment schedule, which is easy to budget and doesn’t fluctuate
- It brings a sense of certainty and security along with peace of mind
But there are few down sides too:
One of the disadvantages is usually that the fixed interest rate loans are 1 to 2.5% higher than floating interest rate depending on the bank or NBFC. Most banks offer fixed interest rates for limited years of the tenure, making the user exposed to floating market rates once the fixed rate tenure period is over. Also, you might have to pay an early repayment charge if you want to make extra repayments or pay off the loan during the fixed interest rate term.
Floating Interest Rates, on the other hand, fluctuate with market condition. But Floating Interest rate too will have fixed component which will be fixed.
It comes with advantages like:
- Floating rate home loans are usually cheaper than fixed interest rates. So even if you are getting a Floating interest rate of 10 percent while the fixed loan is being offered at 13 per cent, you still save money if the floating interest rate rises by up to 3%. It all happens at the cost of risk.
- As the Floating Interest rate tenure is shorter than the whole, if the floating rate goes over the fixed rate, it will be for some period and not the entire tenure. Thus, the floating interest rate brings a lot of savings.
- If floating interest rates go down, you can probably pay off your loan faster if you keep your repayments at the same level.
No coin came with single side, and here is the darker one:
As the rate is floating it can go higher than fixed term rates. If the interest rate goes up, so will your repayments which definitely will squeeze on your budget.One of the major drawbacks with floating interest rates is the uneven nature of monthly installments.
Expert Opinion :
You will benefit by choosing a floating interest rate home loan only as long as the interest rate does not go beyond a certain per cent like 11%.
“Wow! That was something we never knew”, said Mr. Sharma. “I hope I was very clear in explaining every aspect of kind of Interests”, Mr Gupta said shaking hands with the couple who asked for a day to come up with the decision.
Conclusively, when it comes to choosing the type of interest rate, a majority of home loan borrowers go for floating rates rather than fixed. It is also dependent on the current fiscal condition of the nation as well as world. A little eye on the Quarterly Policy review by RBI always helps in decision if the borrower is keen to look into. Also if you have a financial advisor like Banknomics, your that problem will be taken care of even before it starts giving you nightmares. Finally, it is up to the borrower to decide what suits them best. Before taking a decision, it is advisable for the borrower to compare home loans from different institutions in detail, including the various parameters set forth. If certainty and security are prime considerations, a fixed rate home loan will be the best. However, it won’t come without the premium on interest rates.
If you believe experts, since interest rates are likely to fall sooner than later as the economy gets into a higher growth plan along with central bank’s (RBI) continuous falling base rates and its coming after effects, opting for a fixed interest rate at this stage may not be a good idea. Otherwise fixed rate interest rates are a good idea for borrowers opting a home loan for a short tenure like five to seven years. For long term loans opting for a floating interest rate is recommended at this point of time. All the best!