What is a fixed rate of interest?
As the name suggests the Fixed rate of Interest means that the rate of interest on the loan will be fixed throughout the tenure of the loan ensuring that the EMI also remains constant. The rate of interest is not effected by any policy changes or changes in the economic and financial situations of the market and hence gives the customer the comfort of planning his finances accordingly.
Benefits of a Fixed Rate of Interest:
The biggest advantage of a Fixed rate of Interest is that you do not have to worry about any kind of an increase in the EMI under any circumstances. The EMI that you are paying today is the EMI you will be paying 10 years from now.
Helps you manage your monthly budgets better as there are no surprises in store.
At any given point of time in the tenure you know exactly what the principal outstanding and the amount paid up on the loan is. These figures can get very hazy under a Floating rate of interest as when ever there is a increase in the ROI the banks will increase the tenure of the loan while keeping the EMI constant, so you may be surprised that even after 3 years of paying the EMI on a 20 year tenure that you still have another 20 years more to pay.
Disadvantages of a fixed Rate:
Even when the rate of interest goes down you end up paying a higher rate of interest.
Most banks offer only limited period Fixed Rate options like the first 2 years or 3 years after which your rates will be revised as the current market rates, so even in a situation where you can gain if the rates were to go up the benefit will be only temporary.
The Fixed rate of interest is always 1.5 to 2% more expensive than the floating rate of interest. So you will be shelling out extra EMI from day 1.
What is Floating Rate of Interest?
The Interest rates offered under the floating plan is linked to the base rate plus the spread or the floating element. The rate of interest keeps floating upwards or downwards based on the trends in the economy and the cost of capital or the PLR as stipulated by RBI.
Benefits of a Floating ROI
The advantage of a Floating ROI is that it is always cheaper than the Fixed ROI to begin with. So even if there is a slight increase in the base rate the floating rates will always remain 0.5% cheaper than the fixed rates
Since home loan is a very long tenure loan of usually 15 to 20 years the long term perspective on the ROI in India is that it is expected to come down, we have the highest ROI when compared to any of our Asian counterparts like Singapore/Hong Kong/ Japan etc. and with banking sector opening up to new entrants in the next few years it will be quite a struggle for the banks to maintain such rates.
Disadvantages of Floating ROI
The banks in India are very prompt to increase EMI when the ROI goes up but no one decreases it when the ROI comes down ensuring that you do not get any advantage of choosing a Floating option. Most banks do not have any formal process or reason to even increase EMI and do it voluntarily and arbitrarily.
Some banks charge a fee from the customer to revise the rates downwards hence ensuring you shell out extra money for what is your right and that too without any guarantee as to how long the ROI is going to stay on the revised lowered rates
Most banks do not have a formal process of informing a customer on the revision of rates at all, so most customers will never know when the rates went up or came down. So there are a lot of instances where the initial loan was taken for 9.5% and the customer will be paying in excess of 13%.
The current scenario is that almost 90% of all home loans taken are under the Floating plan. So it surely is a smarter thing to do provided you keep a close watch over the EMI and ensure that you are in regular touch with the bank with regards to the movements in the rates. Home loan is not to be treated as a one time transaction and has to be given close attention through out the complete tenure to ensure that you are not duped in the process.