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
| Bank | Fixed | Floating |
| SBI | – | 8.30%-8.70% |
| ICICI Bank | – | 8.40%-8.85% |
| Punjab National Bank | 8.5%-9.75% (1-3 years) | 8.5%-9.75% |
| HDFC | – | 8.35%-8.85% |
| Indiabulls | 9.95%-10.40% | 8.40%-10.05% |
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.