The flurry of repo rate hikes by the Reserve Bank of India (RBI) in recent months has pushed up home loan interest rates. For most banks, the external benchmark to which their home loans are linked is the repo rate. This means that the entire rate hike will be passed on to borrowers.
Given that, it’s likely that borrowers are considering switching to a fixed home loan rate.
For the uninitiated, people who opt for fixed home loan interest rate have to repay the home loan in fixed and equal instalments as per the loan tenure. The advantage of fixed interest rate is that it would not change even if there are fluctuations or changes in the Indian financial market conditions or trends.
On the other hand, floating interest rate is volatile and keeps on changing as per the market scenario. This type of interest rate depends on the base rate offered by several lenders, so whenever the base rate changes, the interest rate gets automatically revised. This can be seen whenever RBI makes changes to its repo rate and the same is passed on to the borrowers.
Here's a comparison between fixed and floating home loan interest rate:
Fixed Interest Rate | Floating Interest Rate |
Higher Interest Rate | Lower Interest Rate |
Not affected by financial market conditions | Affected by changes in the financial market |
Fixed EMIs | EMIs change as per interest rate or MCLR |
Budget planning possible | Difficult to budget or manage financials |
Sense of security | Generates savings |
Suitable for short/medium term (3-10 years) | Suitable for long term (20-30 years) |
Lesser risk | Higher risk |
(Source: Paisabazaar)
How wise is it to shift to fixed home loan rates?
It must be noted that very few lenders offer fixed rate loans. Even then, fixed rates are prohibitively high. Several are in the 10 percent+ range.
According to Adhil Shetty, CEO at BankBazaar.com, a floating rate loan along with regular pre-payments is a better option in the current situation.
This is because we are nearing the peak of the rate hikes and there is a strong expectation that the rates would stabilise globally by next year.
"Keeping in mind the growth concerns, future rate hikes immediately after this cycle do not look imminent. In this situation, you may see your interest rates stabilising or even falling in the next few years," Shetty told CNBC-TV18.com
Moreover, borrowers also have to factor in other charges involved in making a switch from floating to fixed loans. Most fixed rate home loans also charge high pre-payment and pre-closure charges.
In case of floating-rate loan refinancing, borrowers have to pay neither prepayment nor foreclosure charges.
