home loan

Floating rates or fixed rates – Which is better for a home loan?

With regular updates on banks cutting down interest rates regularly being shown in headlines, the prospective homebuyers are going through a dilemma, whether to stick to their variable rate home loans or switch over to a fixed rate loan. When you get a feature-rich fixed rate home loans from NPBS or other lender, it gives you a natural sense of security with regards to long-term commitment as the interest rates remain fixed due to which there are no chances of your monthly payments changing throughout the term of the loan.

Yet, there is a dark side of taking out a fixed rate loan as if the interest rates fall further you would be at a loss as you would have done the mistake of locking your loan at a higher interest rate. It is always recommended to take into account the acute details before taking the plunge.

And if it’s still bothering you, then read on.

Past fluctuations in the rate

When you approach a home loan lender, opting for a fixed rate loan would sound like one sensible thing that you can do if you wish to insulate yourself from the rate fluctuations in the market. The only drawback is the element of uncertainty about the direction of movement of the lending rates.

During the mid 2000s, right from the 7-8% range, the interest rates had suddenly risen to 12-13% in 2010 and now there is a total reverse in the trend as mortgage rates are going through their record low levels. In this situation, deciding whether or not you could opt for a fixed rate loan would become a simple decision. Mortgage loans have long repayment terms and hence despite paying heed to the predictions of the experts, fluctuations may have a bad impact on the overall rate of the loan.

So, when should you opt for a fixed rate loan?

Are you comfortable with the present EMI that you’re paying? If the EMI that you’re paying is less than 35-40% of what you make in a month, you will probably see that loan repayment won’t be a big hassle for you. You might even consider locking your interest rate at this level in order to avert the risk of future hikes which might have a poor impact on your finances. During the initial period of the loan, you would want uncertainty and when you take out a fixed rate loan, it offers you enough security. Therefore, when you wonder about taking out a loan which ensures security, fixed rate loans is definitely a better option.

When should you not go for a fixed rate loan?

Are you planning to prepay the loan? If answered yes and if you’re planning to close the loan within 5-7 years, it is better to carry on with a variable rate home loan. The earlier you plan to close the loan, the lesser is the interest outflow.

Therefore, when you’re in the market to take out a home loan, you should always measure your decision before taking out feature-rich fixed rate home loans. Take all the time you need, remember that part of your future lies in here.

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