Fixed or Floating rate home loan: Which is Better?

One of the com­mon ques­tions for any loan seeker, whether to choose a fixed rate home loan or a float­ing rate home loan. Let’s under­stand both types of inter­est rate home loans.

To know more on fixed rate home loan, read “Fixed rate home loan”

To know more on float­ing rate home loan, read “Float­ing rate home loan”

Which is bet­ter — Fixed rate home loan or float­ing rate home loan

Should a bor­rower opt for a fixed rate home loan or a float­ing rate home loan is a mat­ter of per­sonal deci­sion which has to be taken by the bor­rower. Before you decide which rate of inter­est to go for, under­stand the state of economy.

State of the economy

State of the econ­omy means is the coun­try is into infla­tion or defla­tion. For exam­ple – Japan is a defla­tion econ­omy and India is an Infla­tion econ­omy. It is always advis­able to opt for a float­ing rate home loan for a defla­tion coun­try and a fixed rate home loan in case of infla­tion economy.

Cur­rent sce­nario of the economy

If you believe that inter­est rates are slated to drop in the future, then you can opt for a flaot­ing rate loan. That way, you ben­e­fit when the rates fall. Or, you could even take the fixed option for a few years and the flex­i­ble option later. But, if you opt for a float­ing loan, you must also have an appetite for risk and be able to take it in your stride when rates rise.

Let’s under­stand what are the solu­tions avail­able in case you opt for one type of loan

Float­ing rate home loan — Solution

Let’s say you opt for a float­ing inter­est rate loan. If inter­est rate rises, the bor­rower has two options.

Option 1 — Increase the EMI keep­ing the tenure of the loan con­stant
Or
Option 2 — Keep the EMI con­stant and increase the tenure of the loan.

If you have the appetite for risk and are finan­cially com­fort­able with a higher monthly pay­ment or a longer tenure, go for a float­ing rate home loan.

Fixed inter­est rate loan — Pos­si­ble solution

Nor­mally the Fixed inter­est rate loan is not exactly “fixed” mean­ing the EMI is not fixed for the entire tenure of the loan. Ensure with your lender regard­ing the terms & con­di­tion of the loan. If & only if the lender con­firms and the loan paper doc­u­ments shows the loan to be a fixed rate home loan, then con­sider it.

EMI on a fixed rate home loan does not change. In case of a falling inter­est rate regime, only option avail­able to a bor­rower is to apply for another home loan with a lower inter­est rate from a dif­fer­ent bank and pay off the exist­ing home loan; how­ever a pre-payment penalty is applicable.

Con­clu­sion

To con­clude, if you are in a infla­tion econ­omy like India, it is always advis­able to opt for a fixed rate home loan .

Related posts:

1. Float­ing rate home loan
2. Fixed rate home loan
3. Good News for Float­ing rate home loan, auto loan borrowers
4. HDFC Fixed rate home loan scheme — Fixed First
5. ICICI Bank launched Two New Fixed-Rate Home Loan Products