Floating-rate Home Loans seem cheaper than fixed-rate ones. So, should you consider fixed-rate loans at all? Read on to find out.
“To be or not to be, that is the question,” said Shakespeare in his play Hamlet. The same could very well be considered true when it comes to choosing between fixed and floating Home Loan interest rates. We’ll help you wrap your head around both.
Ravi and his wife Sejal, a working couple from Ahmedabad, had shortlisted their dream home. The couple approached a bank with a housing loan request. Since both Ravi and Sejal had good Credit Scores and other eligibility conditions, the bank approved their Home Loan and offered them a fixed rate of interest for ten years under a special scheme. Since a Home Loan is usually a long-term commitment, choosing between fixed and floating interest rates is usually a tough decision for most applicants. Is it wise now to opt for a fixed rate of interest for your Home Loan?
Let us look at the various aspects of housing loan interest rates in the current market scenario and see if it is really worth finalising on a loan with a fixed rate today or opting for floating interest rates.
Fixed Vs Floating – The Eternal Dilemma
Every Home Loan aspirant has always been confused about choosing the right interest rate option for his or her loan. Banks and non-banking financial companies offer both fixed and floating interest rates. Since interest rates are the most important aspect of any loan, getting it right is the key to avoiding any financial stress or default during the loan tenure.
Additional Reading: Loan Default Is Not The End!
Both fixed and floating interest rates have their benefits and disadvantages and the selection must be done as per the convenience of the borrower. A fixed rate of interest on a loan would mean that the equated monthly installments or EMIs would remain constant over the tenure of the loan. On the other hand for floating interest rates, the EMIs would fluctuate as per the market dynamics, that is, when interest rates increase or decrease.
Additional Reading: What Is EMI And How Is It Computed?
Advantages and Disadvantages of Fixed Interest Rates
Since Home Loans come with a longer tenure when compared to most other loans, a fixed-interest rate brings a sense of clarity when it comes to loan repayment. People with fixed budgets can get a clear idea of their EMI obligations if they opt for a fixed-interest-rate loan.
The biggest disadvantage of such a setting is that the fixed-interest-rate loans are anywhere between 1 to 2.5% higher than floating-interest-rate loans depending on the bank or NBFC. Usually, most banks offer fixed interest rates for a limited number of years and not the full tenure, making the user susceptible to floating market rates once the fixed rate period is over. So, read your loan agreement carefully before you proceed.
Additional reading: Home Loan Handbook: All Questions Answered
Advantages and Disadvantages of Floating Interest Rates
Floating interest rate fluctuates with market economics and interest rates are linked to a bank’s Marginal Cost of Lending Rate (MCLR) or the NBFC’s base rate. The rates are decided by the bank or NBFC concerned as per the quarterly base rate announcements made by the Reserve Bank of India. Floating interest rates are usually lower than fixed interest rates. Also, banks and NBFCs now allow you to choose a fixed EMI even if interest rates change.
Additional Reading: How Much Home Loan Will I Get?
Current Market Scenario
Floating-rate loans have become popular in recent times. A lot of public sector and private banks are now attracting Home Loan applicants using floating interest rates as low as 8.35%.
State Bank of India, the country’s largest bank has come with a scheme offering Home Loans of up to 30 years at rates ranging between 8.30% and 8.7%. ICICI Bank and HDFC, the housing finance company, are also offering floating-rate loans starting at 8.35%.
Experts believe that since interest rates are likely to keep falling at least for the next 2-3 years, opting for a floating interest rate seems to be a good idea. Fixed interest rates will be beneficial for people taking a Home Loan for a longer tenure of twenty or more years if the interest rate offered is on par with floating rates. For short-term loans, opting for a floating interest rate is recommended at this juncture.
Additional Reading: Home Loan Document Checklist
Time-Bound Fixed Rates
Most banks and NBFCs offer fixed interest rates only for a certain time period. Punjab National Bank, for example, is offering a fixed interest rate of 8.5% for 3 years only. After the first 3 years, the loan automatically gets converted into a floating interest rate loan. If interest rates fall during the initial 3 years, the borrower is tied for the 3-year period and will pay a higher interest rate than those opting for a floating interest rate.
Rates offered by some leading banks
|Punjab National Bank||8.5%-9.75% (1-3 years)||8.5%-9.75%|
It is best to compare across lenders to choose the rates and terms that are just right for you. BankBazaar allows you to do just that. Moreover, you can say goodbye to paperwork by opting for a paperless Home Loan application process if you need that loan quickly. Go on and get that Home Loan today.
My mother, at present aged aproximate 65yrs, had taken housing loan in 2002 for construction purpose, in one of the bank which comes under national housing bank on Fixed interest basis, for 15yrs.
But they are changing the interest rates regularly and now they are charging interest of 13.1%. If we ask them reguarding this mater, they are telling that they have not changed the sceme from fixed to floating, but, due to the market condition, they are changing from interest rates regularly.
According to the loan Sanctioned letter issued by them, the loan have to be completed on 2017,, but they are telling that still we have to pay the loan for another 10 years.
Can you please tell Sir, whether the bank people doing like this is correct or not. What can I do to overcome this burden.
Thank You Sir
Thanks for writing to us. Regarding your concern about your Home Loan; in general, fixed rate Home Loans remain fixed for a certain number of years. Please check your loan documents to know more about this. The tenure of the Home Loan cannot be changed unless you have opted for lower EMI payments. Your bank will be able to clarify this for you.
I have taken a home of loan of Rs.15,00,000 from a nationalized bank and the interest rate is under floating rate scheme. From 1.4.2016, the interest rate has been revised downward. When I have asked to revised the EMI, the manager says that I have to deposit Rs.8200/- as revision fee. He also tells me that I am eligible for revision of Rs.230/- per month reduction on account of revision. If I deposit Rs.8200/-/230 = 35 months. If I do that this will be effected throughout or whenever there is a change in the interest rate upward, how is this going to be benefited. Whether each time the revision takes, upward or downward, I have to pay the revision fee. If I don’t opt to pay now Rs.8200/- whether bank will not charge any such fees whenever there is a n increase in the interest. Such rules are ridiculous and no Bank will give information on such issues at the time of sanctioning the loan. Shall be grateful if the above query is answered.
Thanks for writing to us. We do empathise with you but some banks charge a one time fee for converting to a new floating rate. There are usually no charges for subsequent change in rates. Please do get an acknowledgement from your bank that this will be a one time fee. You can also check with the bank to find out whether these terms have been included in your loan terms.
i have applied for a home loan in DHFL . The Interest rate is 0.95% for 15 years. The loan is based on floating rate. Can i go with this? Is it good for me? Is any hidden charges on this loan? Please guide me on this.
Hi Muthu, While we do provide general tips and advice on personal finance, we will not be able to provide guidance on specific queries. We would love to help but due to the specific nature of your question, we suggest that you consult a financial advisor to guide you in this matter. Cheers, Team BankBazaar
Sir. I have applied for personnel loan Rs.10,00,000/- at the rate of interest is 11.90% (floating) at SBI. Now I have been serving in Indian Army and may i know any welfare from any bank for defence persons. I am very confused for which is the best option for floating or fixed.
Hi A Thiyagarajan,
Usually, if banks have benefits like this for their customers, they let you know about it before you apply for a loan. But, you can always check with your bank to find out if you are entitled to any benefit for serving in the Indian Army. Usually, floating rate loans are more beneficial when interest rates are falling. We are presently coming to the end of the interest rate cycle, floating rate loans might make sense only for a few more years.
sir, I had met BM at nearby SBI branch for the purpose of personel loan. But my DSP acct at my native place and i have serve in another place. The BM told to acct transfer from my home branch to his branch. I am surprise because i am acct holder in the same bank then why he asked to transfer my acct. Sir may i know this process is right or wrong.
Hi A Thiyagarajan,
No one can transfer your account without your permission. You can register a complaint with your bank. If you are looking for a Personal Loan, you can check your eligibility here.
I have connected for a home credit in DHFL. The Interest rate is 0.85% for a long time. The advance depends on gliding rate. Would I be able to run with this? Is it bravo? Are any concealed charges on this advance? It would be ideal if you control me on this
Hi Amit Dhall,
While we do provide general tips and advice on personal finance, we will not be able to provide guidance on specific queries. We would love to help but due to the specific nature of your question, we suggest that you consult your financial advisor to advise you.
i am in need of home loan and have approached one private bank .
they are having 8.4 % interest rate, and approx 8.8-9 % fixed.
i want to opt for latter one 8.8-9%, because i want to be stress free.
Hi tabu, You could get a better offer (and it will be stress-free too). Check out which banks are offering you a Home Loan and at what rates here. Cheers,Team BankBazaar
When it comes to choosing the type of interest rate, a majority of home loan buyers go for floating rates.
Overall, it is up to the buyer to decide what suits his needs. Before arriving at any decision, you should compare home loans of various lenders. If your primary concern is certainty and security then go for a fixed rate. However, it won’t come without the premium on interest rates.
Hi Rajan, Thanks for your valuable opinion on the topic. We totally agree with your points. Cheers, Team BankBazaar