Is Fixed Home Loan Rate Really Fixed?

If you are a prospective buyer seeking a housing loan, you would likely go for a fixed rate of interest, for the surety the product offers – the idea is that you are going to pay only a fixed sum for a fixed period to repay your home loan, no matter how markets perform in the future. While that certainty is missing in a floating-rate home loan, even a fixed-rate loan is not as fixed as it may sound.

MakaanIQ lists a few things that you must consider before making up your mind on whether to go for a fixed-rate loan or a floating-rate one:

Repayment charge: In a fixed-rate home loan, the repayment charge remains unchanged only till an agreed tenure – the fixed rate does not remain fixed for the entire repayment period. The agreement is actually subject to re-setting and the money market clause. Loosely defined, the terms of the clauses may confuse buyers. With its omnibus kind of a structure, a fixed rate of interest gives lenders an unfettered right to the money market changes or changes within the organisation.

Market-determined base rate: Under a floating-rate home loan, the base rate changes with movements in the market. Set by the Reserve Bank of India, 'base rate' is a rate below which banks are not allowed to lend. In case of fixed-rate loans, banks can tweak their spread to maintain the rate of interest at the same level, despite any change in base rate due to market movements. Spread is the difference between interest earned on loans and the interest paid on liabilities. It includes the profit figure for the bank. For instance, at a fixed base rate of, say, 10.25 per cent, if the lender sets the spread to 25 basis points, the home loan offered will be at 10.50 per cent. However, if the base rate falls to 10 per cent due to market fluctuations, at the same level of spread (25 basis points), the lender will offer the loan at 10.25 per cent.

Difference in interest charged: There is always a difference of three-four percentage points between the interest rate on floating-rate and fixed-rate home loan products. For instance, the interest rate on a fixed-rate home loan offered by private lender HDFC is 14 per cent, while the rate on its floating-rate home loan is 10.25 per cent.

Limited offerings: Some banks, such as IDBI Bank and Kotak Mahindra Bank, do not offer fixed-rate home loans. The ones that do offer fixed-rate products charge interest at the rate of 12-16 per cent

Additional charges: Loans at fixed rates are accompanied with charges for any changes in the terms, while the equal monthly instalment (EMI) and the tenure can be changed under floating-rate loans without any charge.

So, as a borrower, you must analyse your requirements and compare various parameters before arriving at a decision on the loan type. For instance, if security is the criterion, a fixed-rate option works better.