Home Loans : Floating rate or Fixed rate ?

Lot of people will be wondering , whether to go for fixed rate interest or floating rate for a Home loan. In the below article we will try and help sort the difference between two and which one is the best suited in the present scenario.


So what is fixed rate and floating rate?
Fixed Rate: A Fixed rate home loan , is a loan where in theoretically the rate of interest on home loan is fixed for entire tenure of the loan. But in most cases in Indian banks its fixed for a period of 3 to 5 years and readjusted with PLR after that. One

Floating Rate: In floating rate the interest rate on loan keep on changing as per the Prime Lending Rate (PLR), where in if the PLR increases the floating rate also increases at the same time. But if the PLR decreases the interest rate on the loan also decreases.

So, Which loan to go for? floating rate or fixed rate?
Well the answer lies in two things: 1) Tenure of the Loan
                                                    2) Present Interest rate cycle

The present Prime Lending Rate is approximately at around 11.75 % for Home Loans.

Well most people end up buying fixed home loans when the cost of interest is high and floating rate when the cost of interest rate is low. "How to time the interest cyle" we will discuss another time.

Interest Rate Cycle of RBI

Well in present scenario the interest rates have actually peaked and one can see interest rate moderating post April 2012. Most of the bankers on the street are of the opinion that we have reached the peak of interest rate cycle.

At the same time one must understand that historically highest interest rate have been in the region of 12-14% and lowest in the range of 8%. So one can easily expect the interest rate to start falling from 1st quarter of FY 2012 and bottom out by FY 2013 or 2014.

So what is the best strategy?

A) One should go for floating rate till the interest rates bottom out at around 8%


B) And convert it to fixed after 2 year there by protecting oneself against a rise in rate after that.

The good news is that RBI has waived off prepayment charges, there by making it easier to shift between the two.

The above strategy is useful for those who wish to go for 5- 7 years of Home loan tenure.