Choosing Rates–Fixed or Floating?

Interchanging fixed rate loans to floating rates or vice versa is done to claim benefits of the change in interest rates or to protect from the interest rate changes.

Usually, housing loan rates have been rising in the recent past. Increase in the repo rates, reverse repo rates, and CRR, has resulted in increased interest rates on housing loans i.e. increased floating rates. The fixed rate is considered safer for borrowers as the interest rate remains fixed for the entire tenure of the loan.

Borrowers opting for the floating rate loans are confused whether to stick with floating rate or change over to a fixed rate loan, as the floating interest rate is linked to the market rates of interest, which keep fluctuating. It is a trend that as the market interest rates go up, the interest rate on the home loan also goes up, and vice versa.

Although, such frequent increases in interest rates disturb the borrower’s budgets but it is not advisable to alter a long tenure floating rate housing loan to a fixed rate one. It is required for them to make a cost benefit analysis of availing the switchover option such as levy of conversion charges and penalty on the balance principle payable.

Different banks have different conversion charges which are generally payable on the outstanding loan amount. Moreover, the interest rates are higher in case of a fixed rate loan than the floating rate.

Also, the remaining tenure of the outstanding loan needs to be seen i.e. if it is small, then the net costs would be much higher than the benefits. Hence, it is not in borrower’s interest to switch from “floating” to “fixed” in such a situation.

Business News: