Home loans: Fixed or Floating Interest Rates? – I: Finance Trading Times

Home loans: Fixed or Floating Interest Rates? – I

It’s time that you may have decided to take a home loan. You have a well paid job or business and you know that it is reliable enough to last for many-many years. You can repay the EMI of you home loan during the entire duration of the home loan. So fundamentally, you are prepared and convinced that everything will work well and in your favour.

However, the biggest dilemma that faces each individual seeking house loan is whether to go for fixed interest rate home loan or floating interest rate home loan.

In this article, I’ll try to highlight some fine details that one must keep in mind.

Let me begin with the basics (as I do always).

You decide to buy a house. The builder quotes an amount; say 4 million or 40 lakhs. You approach a bank like ICICI or HDFC that offers you home loan. The bank says that they can offer a percentage of amount as housing loan – say 80%. Therefore, the bank will give you loan of 80% * 4 million = 3.2 million or 32 lakhs. The remaining 8 lakhs you will have to put in from your own pocket. Suppose that your loan tenure is 20 years.

This 3.2 million money worth of house loan will be available to you in 2 options – either select fixed interest rate loan or floating interest rate loan.

If you select FIXED: the bank quotes a FIXED amount that you will have to repay to the bank each month, for the entire loan duration of 20 years. So suppose that interest rates for FIXED home loan scheme are presently at x%, and the bank calculates your EMI or Equated Monthly Installments at an amount of 30,000 per month, that will mean that you will have to repay 30,000 each month to the bank for 20 years. In this case, you will repay a total of 30,000 * 12 months * 20 years = 72 lakhs or 7.2 million

If you select FLOATING: the bank will NOT quote a FIXED AMOUNT, but a VARIABLE interest rate to begin with. The initial interest rate that a bank may quote, for example, may be 13%. Hence, your initial EMI that can be quoted by the bank (based upon the 13% interest rate) can be 28,000. But remember, this is the initial and variable figure. It can change at a later stage – (that’s what is happening with most of the loan borrowers.

Continue to Part II
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