Should You Take A Fixed Rate Home Loan?

  Author: Naveen Kumar

Home loan providing financial institutions provide fixed rate and floating rate home loans. To put it very simply, the interest rate for a fixed rate loan doesn’t change during the tenure or term of the home loan. In contrast, the interest rate can be changed by the home loan providing institution during the loan term in case of a floating rate home loan. For a new borrower like you, the question often is about which type of home loan works for you? To get the answer for yourself, you need a brief primer on one aspect of home loans.

A major part of your EMI comprises of interest payments during the first half of your loan tenure. Therefore, any change in home loan interest rates plays significant role in this period.  It can make a can huge difference on the total amount of home loan interest you end up paying.

It is in this backdrop, you need to view a fixed rate home loan. You also need to factor in whether interest rates, especially home loan interest rates are broadly rising or falling.

When interest rates are falling If there is a high likelihood of lower interest rate in the future, you would end up paying a much higher interest by taking a fixed rate home loan. A person with a floating interest rate home loan would pay much lower interest when the interest rate comes down.

When interest rates are rising If there is a greater likelihood of home loan rate rising in the near future, opt for a fixed rate home loan. It would shield you against a rising interest rate since you will continue paying the same EMI.

Be prepared to pay a premium for a stable EMI If you are not comfortable with home loan rate fluctuations and are willing to pay a premium for a stable EMI, opt for a fixed rate home loan. However, do remember that even a fixed rate home loan is not completely insulated from rise in home loan interest rate. The home loan provider may hike the home loan rates applying the “reset clause” in the hone loan agreement.