Is a fixed rate home loan better or a floating rate home loan?A fixed interest rate is one that remains unchanged during the entire tenure of the loan. Most banks give fixed rate loans with a reset clause. In such a case, the bank resets the interest rate after a specific time period, usually five years or so.
Unlike the ‘fixed’ interest rate on home loan; floating rates will be changed by the bank. This interest rate is lined to a benchmark rate and, hence, moves up or down along with the benchmark. Most banks do not offer genuine or transparent floating interest rates.
To check whether the bank offers transparent floating interest on home loans, request for its record of benchmark rates. This data will help you whether the bank has actually passed on the benefit of reduced rates to its existing consumers at the time when the lending rates fell rather dramatically.
We strongly recommend the option of transparent floating interest rates to you as these loans are at least 2 percentage points cheaper than a comparative tenure fixed rate home loan. Also, there is safety in numbers as more than 90 per cent home loan consumers seek floating rates.
Also, you get the benefit of reducing interest rates as (not if) and when the interest rate cycle turns and commences on its downward journey. Even if the interest rates rise, in the interim as long as they do not rise above the 1 per cent differential; you are still a net gainer.
