- Floating Rate Home Loans:
- The interest rate you are charged on a floating home loan is specified as a deviation on a index rate set by the lender, which will change due to
changes in macro-economic factors such as decisions by the Reserve Bank of India.
- If the index rate increases, then your home loan interest rate will increase causing the tenure of your loan to be increased because banks try to
keep your EMIs constant. Similarly if the index rate decreases, then your home loan interest rate will decrease causing the tenure of your home loan to be
decreased.
- Essentially in a floating rate home loan, the bank passes on the risk of macro-economic factors to the borrower.
- Fixed Rate Home Loans:
- Fixed rate home loans interest rates are typically not guaranteed to be fixed for the entire tenure of the loan. Fixed rate home loans offer you
rates that are only fixed for a few years, after which the bank has the right to increase the rate at their discretion.
- When market rates decrease the rates of floating rate home loans go down passing on the benefit to the customer, however people with fixed rate
home loans are not benefited. On the other hand when market rates increase the rates of both floating rate home loans and fixed rate home loans increase (This is
because fixed rate loans have a clause which permits banks to increase the rate at their discretion after a few years).
- The initial rate on a fixed rate home loans is at least 2% more than that of a floating rate home loan
From the above you see that in a fixed rate home loan, you pay a higher initial interest rate for the benefit of being shielded from the risk of rate increases but you
are actually exposed to these risks anyway as the bank can reset your rate after a few years. Plus you do not get the benefit of falls in market interest rates. This
is why fewer than 10% of home loans being disbursed in India are fixed rate loans.