Fixed Vs. Floating Rate of Interest…
Rate of interest is the amount of interest paid for the principal taken from the housing finance corporation. Rate of Interest is categorized as follows:
1) Fixed Rate of Interest
2) Floating Rate of Interest
1) Fixed rate of interest:
Under fixed rate of interest, interest charged is invariable throughout the loan period. But this will come at a cost. Interest rates on fixed home loans are higher than those on floating home loans. Sure you get the certainty that home loan rates will not rise but you end up paying more for it. The interest rate on a fixed home loan is around 1% - 1.25% higher than that for a flexible home loan. There are different options available under fixed rate which are enlisted below:
a) Fixed Rate of interest for three years:
Under this customer pays fixed rate of interest irrespective of market fluctuations for initial three years. Then he/she can switch to floating rate of interest or Continue with the current fixed rate of interest.
b) Fixed Rate of Interest for Five years:
It works similarly like 3 year fixed rate of interest the only difference is rate is reviewed after 5 yrs. This comes little costlier than 3 years fixed rate of interest.
2) Floating Rate of Interest:
This is the rate of interest that fluctuates according to the market-lending rate. This means you stand the risk of paying more than you budgeted for in case the lending rate goes up. Floating interest rates are offered at slightly low rates as compared to the fixed rates, as the borrower bears the risk of fluctuations. If the rates reduce or remain constant over the loan tenure, the borrower shall gain, as the rate under the floating rate scheme will be lower as compared to a fixed rate. Whereas, if the interest rate increases over a period of time, then it could turn out to be expensive, if your lender does not allow you to switch from a floating rate to a fixed interest rate scheme.
3) Partly Fixed & Floating Rate of Interest (Hybrid Loan):
A loan that splits the total loan amount into two parts. One part is charged at a fixed rate of interest and the other part a floating rate. The customer is given the option of deciding upon the ratio of the loan amount under fixed and floating rates. So you could take half or quarter or three-quarter of the loan at a floating rate and the rest at a fixed rate, depending on your risk appetite. Some banks split the tenure of the loan, fixing the first two to three years at a fixed rate and then allowing the rest of the loan to float. When interest rates rise, your EMI or tenure of the floating rate part of the loan will increase. There will be no change in the fixed part of the loan. When interest rates rise, the greater the proportion in a fixed rate, the better it is for you or vice a versa.
"Switching of your interest option is also available with banks but that comes with cost on the principal outstanding. It may range between 0.5-2%."