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L.Srikumar Pai
B.Sc( Engg.), MIE, MIWWA, MICI
Civil Engineer & CAD Specialist
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Housing Loan -Fixed rate or floating rate
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Home loan seekers usually face a dilemma of whether to opt for fixed rates or floating rates. This is mainly because many of them do not know the exact nature of differentiation between fixed rates and floating rates. There are some fundamental differences between the various rates on offer that individuals must appreciate before opting for a home loan.

To begin with, there are two basic types of home loans based on the interest rate - fixed rates and floating rates. Within the two broad categories exist sub-categories. The differentiation amongst the sub-categories has been outlined below:

1. Fixed rates
Fixed rate home loans are loans available with a fixed rate of interest for a given period of time. There are two basic types of fixed rate loans:

a) Fixed rate (fixed for 3 years)
Here, the rate of interest is fixed for the initial three years after which it is subject to review. At the end of the 3 -year period, the interest rate could be aligned with the prevalent interest rates at that point in time.

b) Fixed rate (fixed for 5 years)
This type of interest rate differs from the 3-year fixed rates only in one aspect; the time period after which the interest rate is reviewed. Here, the time period for a review is five years. The 5-year fixed rates are also ‘costlier’ as compared to 3-year fixed rates by around 0.25%-0.50%.

2. ‘Pure’ fixed rates
The interest rates under a pure fixed rate loan are fixed throughout the tenure. In other words, interest rates do not fluctuate with a change in the market rates. This is unlike the regular fixed rates (fixed for 3-5 years) or floating rates where the rates are brought up for review periodically. It is also because of this reason that the pure fixed rate loans are costlier as compared to their counterparts. For example, a certain HFC charges an interest rate of 10.50% on its pure fixed rate loans, which is 0.25% higher as compared to its regular fixed rate loans.

However, keeping in mind the interest rate fluctuations in recent times, not many housing finance companies (HFCs) offer pure fixed rates on their home loans.

3. Floating rates
Floating rate home loans are linked to the prevailing market rate of interest. Floating rate loans are therefore subject to change at periodical intervals. Typically, a floating rate is brought up for review once every quarter. However, the time period can differ across HFCs. For example, a certain HFC has a rate review annually (subject to changes in the prime lending rate).

Fixed rate or floating rate: Weigh your options ( these rates are for  example only )
  Fixed rate (%) Floating rate (%)
HDFC 10.50 9.25
IDBI Bank 10.00 9.00
ICICI Bank 10.25 9.00

4. Part fixed, part floating rate
Some HFCs have now begun offering home loans which are divided into two parts- one part of the home loan amount has a fixed rate of interest while the other part is subject to floating rates. The customer is given the option of deciding upon the ratio of the loan amount under fixed and floating rates.

Having understood the differences between fixed and floating rates of interest, it would also be worthwhile to know how to evaluate the two options. Individuals who have a view on interest rates as well as an appetite for risk and can take interest rate fluctuations in their stride can consider opting for floating rate home loans. On the other hand, risk-averse individuals who cannot stomach interest rate fluctuations and prefer a degree of stability in the EMI (equated monthly instalment) outgo should consider locking themselves into the fixed/pure fixed rate.

( Courtesy: )

( Final word: When it comes choosing the interest rate regime, majority of home loan borrowers, in fact over 90% of them go for a floating interest rate home loan. Finally, it is up to the borrower to decide on what suits him the best )


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