To Choose Floating or Fixed?

August 4, 2007	(3 votes, average: 3.33 out of 5)  Loading ...
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There has been a considerable increase in home loan interest rates for the past few months. People who have earlier opted for floating rate loan are now repenting for not having chosen the fixed rate loan. Have soaring rates not hit the fixed rate loan borrowers? Is it safe to narrow down on the fixed rates or Can there be any complications with it as well?

With such questions framing the debate, we now turn our article to specific challenges associated with each of the options.

Fixed Rate Loan

A fixed rate is one where the interest rate is supposed to be the same throughout the tenure of the loan. There are products where ‘fixed’ rate remains fixed for a particular time span.

Fixed rate loans are always preferable if the interest rates are slated to go up in future and can make budgeting easier due to the fact that all payments should for the same amount. Likewise, fixed rates have their own limitations. They attract higher premium compared to floating.

You are recommended to go for the fixed rate if you are buying commercial property. Again, if you have plans to borrow a loan with repayment tenure of 20 years, as there is pre-pay option, in seven years or more, then you should go for the fixed rate. However, if you can repay the loan within 3-4 months, you are advised to go with floating rate.

Floating Rate Loan

Floating rate loans are worthwhile when interest rates are declining. They are associated with the prevailing market rate of interest and are therefore subject to change at periodical intervals. HFCs and Banks review their floating rates once every quarter. But, the time period can vary across HFCs.

In case, you want to go with a floating rate, ensure that you have enough savings to pay hefty equated monthly installments (EMIs), else you may have to repay the EMIs over a longer tenure, which translates to financial commitment for the a long term. This is why floating rate loans always demand a strong financial planning.

Finally yet Importantly…..

Our economy is progressing well at 9.2 per cent. Whether it is service sector or industries roll eyes in any sector and you will find it growing at a decent pace. As of now, the inflation is 4.03 per cent, the latest figure compared to 6 per cent earlier. The only available reason seems to be fast money supply that the Reserve Bank of India (RBI) earnestly wants to curb.

At present, fixed loan rates are on the high and are not likely to fall in the next 5-6 months. If you have fixed rate loan and want to switch to floating in case rates fall, you can do it by paying conversion charges – which are approximately 2 per cent of the outstanding principal amount.

As such, if floating rate increases, fixed rate will also rise. Therefore, always scout your options before taking the plunge and signing the agreement. First, observe the current interest rates scenario to have a fair idea about whether to go in for fixed or floating interest rates.

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