Usually, when individuals consider a home loan, the four things they look at are:
- Interest rate;
- Loan processing fee;
- Equated monthly instalments (EMIs).
After all, buying a house on a home loan is an important financial decision and the interest rate is the key aspect of it.
While doing this research, you may have come across terms such as fixed rate home loan and floating rate home loan, leaving you perhaps bemused. So here, let’s understand the difference between them and which one you could opt for.
Fixed Rate Home Loan – The rate of interest in case of a fixed rate home loan is fixed for the entire tenure of the loan. This means it does not change as per the interest rate scenario. Thus, this does not expose you to market
fluctuations. However, do note, that rate of interest for a fixed rate home loan is slightly higher than on a floating rate home loan.
If you find the current interest rates conducive or believe that interest rates could go up in the future, it would be wise to opt for a fixed rate home loan. But if the interest rates go deep down, you could be at a disadvantage —paying a higher
On the other hand, if the average rate of interest over the tenure of the loan is almost at par, then that may not make much difference.
Certain banks/lenders also provide you with the option to reset the rate after a specified number of years. And with a few banks/lenders, while they offer the option of a fixed home loan rate, it is valid only for a few years —after that, the
rates as revised as per the on-going rates. So, do check the fine print carefully.
You need to recognise what suits you the best. The EMI you pay should not exceed 40-50% of your total net take-home pay.
If you opt for the fixed rate home loan and wish to prepay it, keep in mind that bank/lender can levy a prepayment penalty. In the case of Axis Bank, it is 2% of the principal amount outstanding.
Floating Rate Home Loan – Unlike a fixed rate home loan, a floating rate home loan is subject to change in accordance with the interest rate scenario. It is subject to Marginal Cost Based Lending Rate (MCLR) plus a markup. Hence,
when the base rate/MCLR changes as per the interest rate scenario, the floating rate also changes.
Resetting a floating rate home loan’s interest rate is done at specified intervals by the banks/lenders. In case of Axis Bank, the MCLR reset for a home loan is reset on a half-yearly basis. If there is any change in the interest rate scenario
during this period, the rate of interest on the floating rate home loan could move either up or down.
But in order to avoid frequent revision in your EMIs, which has a bearing on your budgets, banks usually keep the EMIs unchanged and with the changing interest rate, your loan tenure, however, could either increase or decrease. If the interest rates
move up, your total loan tenure could move up a bit, and vice versa. However, you can even request the lender/bank to change your EMI as the interest rates move up and down.
Do note that the interest rate on a floating rate home loan is usually lower than on a fixed rate home loan. Therefore, even if interest rates move a bit, you could still end up paying a lower rate. And even if it does exceed, this may be for a short
duration and not for the entire home loan tenure.
If you are unsure of which direction interest rates could move, it would be prudent to opt for a floating rate home loan. Moreover, after you opt for a floating rate home and in case prepaying it, there are no prepayment charges. Owing to the advantages,
a floating rate home loan is more popular than a fixed rate home loan.
Switching from a fixed rate to floating rate home loan or vice versa
During your home loan tenure, if you wish to convert from fixed rate home loan to floating rate home loan or vice versa, that’s possible at a nominal fee, which is anywhere between 1-2%. At Axis Bank the charges are as under:
Notwithstanding the above, if you wish to move from a higher fixed rate to a lower fixed rate, or from a higher floating rate to a lower floating rate, the charges are lower —usually 0.5-1.0%. For such cases, Axis Bank charges as under:
Choose between a fixed rate home loan and floating rate home loan after weighing the pros and cons and assessing what suits you the best.
And in case, anytime during the tenure of your home loan you wish to switch between the two, that option is available at nominal fee.
At Axis Bank, both fixed and floating rate home loans are available as per your preference.
Disclaimer:This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.