At a time when the interest rates on home loans are rising, a borrower may think of taking a loan at a fixed rate rather than a floating rate. While the EMI remains the same in a fixed rate loan through the loan tenure, the fixed interest rate is higher than the floating interest rate, especially in a rising rate regime. The difference can be up to 200 basis points.
Moreover, borrowers will have to pay a penalty for prepayments and even loan transfer to another bank will be expensive. On the other hand, in a floating rate loan, the EMI or the tenure will change depending on the changes in the repo rate. When the interest rates fall, borrowers with floating rate benefit the most.
Fixed or floating?
Banks and housing finance companies offer variants of fixed loans for three, five or 10 years. If you are a new borrower, a fixed-rate home loan will be suitable if the interest rate is low.
Since May this year, the Reserve Bank of India has hiked the repo rate by 140 basis points in an effort to curb rising inflation. Adhil Shetty, CEO, Bank-bazaar.com, says more hikes are likely to follow if inflation continues to exceed expected levels. “If you are a new borrower, borrowing at a fixed rate would safeguard you against future hikes in interest rates. It is advisable to now borrow car or personal loans at fixed rates,” he says. On the other hand, existing borrowers may be paying higher EMIs following the three repo rate hikes. “As an existing borrower, shift your fixed-tenure loan only if a lower rate is available to you, without any additional charges. Before you shift, do the math to ensure your overall cost either reduces or remains stable,” he says.
Not too many options
While opting for fixed interest rates should benefit borrowers during a rising interest rate regime, much would depend on the availability of fixed interest rate loan options and the interest rates charged on such loan options. Ratan Chaudhary, head of Home Loans, Paisabazaar, says most banks and NBFCs, barring a few state-owned banks, offer personal loans on fixed interest rates. “In case of home loans, the reverse is true as very few lenders offer home loans on fixed interest rates. The ones which do usually charge higher interest rates for fixed rate home loans as such loans carry higher interest rate risk for the lenders,” he says.
What should you do
Choose a fixed-rate loan if you have a stable income and do not foresee any issues making fixed EMI payments. You should also be willing to forego the benefits from any drop in the repo rate. Also, for pre-payments, the lender will levy a fee. “Many lenders require their borrowers to complete a pre-determined number of EMI payments before opting for prepayments. Some lenders have capped the proportion of the outstanding loan amount of a fixed rate loan that can be prepaid in a year,” says Chaudhary.
Many lenders also charge a switching/conversion fee from borrowers opting to switch their loans from floating to fixed rates and vice versa. So, before taking the final call, compare interest rates, the current and future market conditions and the prepayment charges.
Fixed vs floating
* Very few lenders offer home loans on fixed interest rates
* In case of a fixed rate loan, the lender will levy a pre-payment fee, which is not the case in a floating rate loan
* If you are an existing borrower, consider shifting your fixed-tenure loan only if a lower rate is available to you, without any additional charges