Avoid Fixed Rate Home Loans – Here’s Why
At a time when interest rates on home loans are rising, a borrower may consider taking out a fixed rate loan rather than a variable rate one. While the EMI remains the same in a fixed rate loan throughout the life of the loan, the fixed interest rate is higher than the variable interest rate, especially in a rising rate regime. The difference can be up to 200 basis points.
In addition, borrowers will have to pay a penalty for early repayments and even transferring the loan to another bank will be expensive. On the other hand, in a variable rate loan, the EMI or term will change based on changes in the repo rate. When interest rates fall, variable rate borrowers benefit the most.
Also read: How many types of home loans can you get in India?
Fixed or floating?
Banks and housing finance companies offer three-, five-, or 10-year fixed loan variants. If you are a new borrower, a fixed rate home loan will work if the interest rate is low.
Since May this year, the Reserve Bank of India has raised the repo rate by 140 basis points in an effort to curb rising inflation. Adhil Shetty, CEO of Bank-bazaar.com, said further hikes should follow if inflation continues to rise above expected levels. “If you’re a new borrower, borrowing at a fixed rate would protect you against future interest rate hikes. It is advisable to borrow car or personal loans at a fixed rate from now on, ”he specifies. On the other hand, existing borrowers could pay higher EMIs following the three repo rate hikes. “As an existing borrower, only switch your fixed-term loan if you are offered a lower rate, at no additional cost. Before you switch roles, do the math to make sure your overall cost goes down or remains stable,” he said.
Not too many options
While the choice of 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 applied to these loan options. Ratan Chaudhary, Head of Home Loans at Paisabazaar, says most banks and NBFCs except a few public banks offer personal loans at fixed interest rates. “In the case of home loans, the reverse is true because very few lenders offer home loans at fixed interest rates. Those who typically charge higher interest rates for fixed rate home loans because these loans carry higher interest rate risk for lenders,” he says.
what should you do
Choose a fixed rate loan if you have a stable income and don’t anticipate any problems making fixed EMI payments. You should also be prepared to give up the benefits of any drop in the repo rate. In addition, for advance payments, the lender will charge a fee. “Many lenders require their borrowers to make a predetermined number of EMI payments before opting for prepayments. Some lenders have capped the proportion of the outstanding amount of a fixed rate loan that can be prepaid in one year,” says Chaudhary.
Many lenders also charge a switch/conversion fee to borrowers who choose to change their loans from floating rates to fixed rates and vice versa. So, before making the final call, compare interest rates, current and future market conditions, and prepayment charges.
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Fixed vs floating
* Very few lenders offer home loans with fixed interest rates
* In the case of a fixed rate loan, the lender will charge a prepayment commission, which is not the case in a variable rate loan
* If you are an existing borrower, consider switching your fixed-term loan only if a lower rate is offered to you, at no additional cost