Finance blogHome Finance

Amidst volatility, is floating rate home loan better or fixed rate home loan?

Amidst volatility, is floating rate home loan better or fixed rate home loan?

Volatility in the broader market always brings an opportunity and fear among people who took a conventional approach towards their finances. Firstly, understand all the relevant quintessence of home loan interest rate types available in the market then only able to make a sound decision. Based on various financial parameters floating rate home loans are more transparent and flexible compared to fixed rates.

The Reserve Bank of India (RBI) has linked all kinds of home loan lending with repo rates on 1st October 2019. The linking of home loan rates to external benchmark rates has brought transparency in the lending. Amidst lockdown, the central bank reduced repo rates by 115 bps (basis points) due to which borrower has witnessed a consistent decrease in their home loan interest rates.

Generally, lenders decide home loan rates based on several factors such as the RBI policy rates, the cost of funds, credit risk assessment, and other broader market interest rates. It is very difficult to predict the market and movement in the home loan interest rates.

In the case of fixed-rate home loan, equated monthly instalments (EMIs) remain the same throughout the loan tenure. Usually, lenders charge higher interest rates for home loans to cover their financial risk associated with lending. When you compare both floating and fixed interest rates for a home loan from the same lender, the difference is as high as of 250-400 bps.

Source: Paisabazar.com

Floating rate home loans do not attract any prepayment charges, but lenders charge a levy of 2% of the outstanding principal amount in fixed-rate home loans. Floating rate home loans are more cost-effective for borrowers if they are wishing to make prepayments in future.

The major drawback in a fixed rate home loan is that if the external benchmark rates remain stagnant or reduce during the tenure of your home loan, you will not get the benefit of reduced repo rates. The interest rate for your home loan will remain the same for entire loan tenure.

Above all, floating rates home loan gives flexibility in moving between banks and benefit from competitive pricing structures. Borrowers have the freedom to move their home loan account from one bank to another if they do not get the desirable benefits of reduced rates in the market. In case of rising interest rates, fixed-rate home loans are bit expensive compared to floating rates.

If your loan tenure is short, a borrower should opt for fixed-rate home loans amidst volatility. But if the loan tenure is long, it’s better to go with floating rate home loans.

Share this post

Comments

comments