Fixed or floating home loan rates? Which is better?

Updated: Friday, March 8, 2013, 12:47 [IST]

Taking a home loan on a fixed rate or a floating rate is often a dilemma for an individual and the choice is not easy. But, in this article we would tell you why you should tilt your decision in favour of floating home loan rate.

What are fixed home loan rates?

As the name suggests, fixed home loan rates are the rates that stay fixed over the tenure of the loan and do not change. This means that the equated monthly installments would remain the same. If interest rates fall, you do not stand to benefit as your rates remain fixed.

What are variable or floating fixed home loan rates

Floating home loan rates will vary over the period of the loan and are linked to the prime lending rate or retail prime lending rate of an institution or bank. For example, a bank may decide to fix the home loan rate at 1 per cent over its prime lending rate. Currently, floating home loan rates are cheaper then fixed home loan rates by a margin of 0.75 per cent to 1.25 per cent.

Which is better?

As indicated, currently floating rates are cheaper by 0.75 per cent to 1.25 per cent over fixed rates. It's unlikely that with such a huge interest rate differential, floating rates would match fixed rates in the next few years. Also, interest rates in the economy are trending down and the RBI has already cut repo rates once this year, with the chances of cutting it again later this month.

This means that floating interest rates would fall further, while fixed rates would not change, increasing the gap further between fixed and floating rates.

It's therefore, best to go in for floating rates of interest, as the difference is simply too large at the moment and is unlikely to be bridged. Remember, even a small differential of 0.10 per cent on a home loan, can mean a lot.

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