Home loan Floating vs Fixed interest rate
While going for a home loan one is in a fix, whether to opt for a loan with fixed interest rate or floating interest rate. Let us see the differences between these two options and how to make the right pick when going in for a home loan.
Floating interest rate home loan
This is most preferred option, as the interest rate is linked to MCLR or base rate or prime lending rate of bank/NBFC. Any change in MCLR rate/base rate /prime lending rate will lead to change in your home loan interest rate.
Interest rate is lower as compared to fixed interest loan, hence you will be eligible for higher loan amount.
Any reduction in interest rate will reduce your tenure, while hike in interest rate will result in increase in home loan EMI or home loan tenure.
In MCLR linked floating interest rate home loan, the interest rate is fixed for one year. After one year latest MCLR rate will be applicable.
No prepayment penalty is applicable, irrespective of source of fund.
Fixed interest rate home loan
There two types of fixed interest home loan rates
1.Fixed interest rate home loan for full tenure: In this option the interest rate is fixed over the entire tenure of home loan. Your home loan EMI will remain not change over the entire tenure of home loans and thus one is protected from fluctuations in interest rates.
2.Fixed interest rate home loan for certain period: In this option the interest rate is fixed for certain period of time (1 year to 10 years). After completion of fixed tenure, your home loan will be reset to floating rate prevailing at that time.
Interest rate charged in fixed interest rate for certain period option will either be equal or slightly more than floating interest rate.
After reset if prevailing floating interest rates are higher than your fixed home loan rate, then there will be corresponding hike in your EMI. If rates are lower, then there will be corresponding reduction in your EMI. This is a risk associated with this option of fixed interest rate home loan product, as a drastic change in home loan EMI may affect your finances.
Example: You take a 20 lac home loan with option that interest rate will remain fixed at 10% for initial three years. After three years it will move to floating rate. If floating interest rate prevailing at the end of three years is 11.5%. Additional 1.5% interest rate will result in monthly EMI to rise in single month by approximately Rs 2000.
Interest rate is higher as compared to floating interest rate home loan, hence you will be eligible for lower loan amount.
During the period for which your interest rate is fixed, any change in market rates will not affect your home loan EMI or tenure.
One is protected from interest rate hike, but one also cannot enjoy benefits of lower interest rates.
Prepayment penalty is charged on fixed interest home loan, if it is funded by other then own sources. Thus if you transfer your loan account to another bank, you will have to pay approximately 2% prepayment penalty.
Which option to choose?
One should go in for fixed home loan interest with full tenure only if, one wants security and certainty of fixed EMI at the expense of paying higher interest rate.
If you go for floating rate option, then interest rate will be lower and you will be eligible for higher loan amount. Even if the interest rate goes up, it will not be permanent as rates will come down as the cycle changes.
Currently we are in interest rate reduction cycle, wherein interest rates are expected to reduce in short to medium term. Thus in present circumstances floating interest home loan should be the preferred option.