The dilemma in home loans: fixed or floating interest rate?

 For borrowers, deciding between a floating rate and a fixed rate home loan has always been a difficult decision. This topic has received a lot of attention, and a Google search will provide some results. Having stated that, a right perspective is required. Let's start with the fundamentals.

The term "floating rate" refers to the fact that your current interest rate is determined by the current rate environment. As a result, as interest rates in the economy rise or fall, the rate you pay will rise or fall in lockstep.

It floats with some reference benchmark, hence the name 'floating.' The term "fixed rate house loan" is a bit of a misnomer. While the interest rate appears to be constant based on the name, there may be a condition in the fine print stating that the loan provider may raise the rate at any time due to a change in circumstances.

This is known as a fixed or floating-fixed rate home loan, in which the interest rate is not as volatile as a floating rate but may change under specific circumstances. Then there's the fixed rate loan, which can be referred to as legitimate fixed or fixed-fixed rate loan if you read the contract carefully or get legal advice.

From the perspective of the loan provider, which may be a bank or an NBFC, they would be more comfortable offering a lower rate of interest on a floating rate loan than on a fixed rate loan, because they can increase your rate if interest rates rise, which will happen as the economy cycles.

The provider of a fixed rate loan, particularly a fixed-fixed rate loan, is bound by the agreed-upon interest rate. As a result, in a fixed rate loan, they would rather fix the rate on the higher side from the standpoint of their own margin.

Borrower’s perspective

Now the major question is: which one should you choose from the standpoint of the borrower? If your loan is for a short period of time, such as five years, a floating rate is advantageous because you get a cheaper rate to begin with.

Keep in mind that interest rates may rise. Even so, given the short term and the fact that economic cycles take time to play out, you should expect to pay a rate lower than the fixed rate for the majority of your loan term. Because the difference between floating and fixed rate EMIs is large, banks are now only giving floating rate loans and not displaying fixed rate EMIs.

That example, fixed rate loans have a considerably higher interest rate than floating rate loans, therefore offering them to customers makes little sense. NBFCs, on the other hand, provide both fixed and adjustable rate loans. This allows you to determine where you would break even if interest rates rose.

On the other hand, if the fixed-rate loan is only nominally fixed and not truly fixed, you may believe you are buying peace of mind by presuming EMIs would not rise. But you never know.

If you take out a long-term loan with a floating rate, the interest rate cycle may reverse, and you may wind up paying the same amount as if you had taken up a fixed-rate loan. If this happens, you may want to switch to a fixed-rate loan so you know exactly how much you'll end up paying. However, there will be charges/fees associated with the changeover. However, if the loan amount is not excessively tiny, it is worthwhile. When the rate cycle reverses, say after a year or two, you can track fixed rates across providers and optimise by shifting; when the rate cycle reverses, say after a year or two, you can track fixed rates across providers and optimise by shifting.

Current situation

A year ago, the rules for floating rate loans were changed. All new variable rate loans given by banks from October 2019 onwards should be benchmarked to an external benchmark, according to a September 2019 RBI circular.

Banks used to be a pet annoyance of banking loan consumers, and rightly so, because they were fast to boost loan rates when interest rates went up, but sluggish to lower them when rates went down. The RBI repo rate or the 3-month/6-month treasury bill yield are two external benchmarks that a bank can use. It was also indicated that the external benchmark interest rate would be revised at least once every three months. An external benchmark is one whose setting is independent of the bank's decision or influence.

For example, the repo rate, which is the rate at which the RBI loans to banks for one day, is set by the RBI and is thus external. Rate transmission will be faster on both sides, up and down, with external benchmarking.

The spread maintained by banks is currently on the larger side, with the repo rate at 4%, the lowest rate at 6.75 percent, and the majority of rates at or over 7%. While banks are free to set their own spreads over external benchmarks, the RBI circular said that "credit risk premium may alter only when the borrower's credit assessment experiences a considerable change, as agreed upon in the loan contract." Banks are hedging their bets. If interest rates rise in the future at the same spread, the rate will rise even more.

Interest rate cycles will shift over time, and no one can predict when they will occur.

Rather, when rates do vary, you can compare the fixed and floating alternatives, which are both subject to fees. For the time being, a floating option is preferable because interest rates are cheaper, with one bank providing 6.75 percent. Instead of being under the delusion of a so-called fixed rate loan, you begin with the benefit of a low rate and are aware that it may rise.

Conclusion

There's no need to be discouraged if your personal loan application is turned down. To boost your chances of loan approval, simply work on improving your credit report and following the methods outlined above. Once you've completed this checklist, you're ready to submit your personal loan application.To find about the best pricing and deals, call our toll-free number +91-9477079053. They'll help you in every way they can. Please contact me at Best Home Loan In India if you have any more.

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