AFTER Reserve Bank of India reduced the repo rate by 25 basis points last month, banks and housing finance companies have started lowering their lending rates marginally. Taking the lead, State Bank of India has cut its home loan rate to the lowest level in six years to 9.1% (for women borrowers). Other major lenders such as ICICI Bank and HDFC, too, have reduced interest rates on their home loans by 15 basis points.
So, with interest rates falling and stable real estate prices for the last six months, should you opt for a housing loan with fixed rate of interest? Fixed home loan rates makes sense if interest rates are likely to rise in the the future or if rates have stabilised at low single digit.
Fixed or floating
Even in fixed rate, there are two types—one that stays constant throughout the loan tenure and the interest charged is higher. In the other type, banks review the fixed rate periodically and the rate of interest is slightly lower. Since home loan is for a longer tenure —20-25 years—a borrower must compare various parameters and then decide on the type of interest rate. If the borrower is looking at certainty and security, then he should opt for fixed rate home loan. However, it will come with a premium on interest rates and if rates dip further, he would have locked himself on to a higher rate.
Advantages of fixed rate
If the objective is to protect oneself from interest rate fluctuations, fixed rate will make sense. If you are comfortable with the current EMI and expect higher income, then you can opt for fixed rate to avoid potential rate hikes. You can also opt for a part-fixed-part-floating-rate loan which will offset a part of the rise in interest rates. Fixed rates make sense if you do not want to prepay the home loan and service it a long time. The earlier you close the loan, less the interest outflow. If rates move up, the interest payout will also increase.
Disadvantages of fixed rate
Borrowers have to pay higher rate for fixed rate home loan as compared with floating rate loan. As the tenure of the loan is long, if interest rate falls, the borrower of fixed rate will lose out and continue to repay the same amount. If you plan to close the loan in 5-7 years, then avoid fixed rate. If you have opted for a short duration loan, say 10 years, don’t go for fixed rate. In fact, for short duration loans, the interest outflow is less as the loan advances in tenure. The EMI will increasingly repay principal outstanding.
Check with banks
Check with the bank whether the fixed rate home loan is fixed for the entire tenure or only for a few years. Banks also offer the option of switching from fixed to floating for a fee. It makes sense to go for fixed home loan rate if the interest rate is in single digit or if the difference between floating and fixed rate is more than 1%. While most home loan borrowers go for floating rates, one must compare the rates, terms and conditions of various banks before finalising the loan.