To start of with its always other way round.
Fixed rate is always higher than the floating rate.
Why do the bank take higher rate for Fixed compare to Floating rate ?
Banks normally charger 0.50% to 2.00% more than the Floating rate based on the fixed period tenure. You can opt for 2-years fixed, 5-years fixed or 10 years fixed or fixed till closure. Based on the how fixed tenure banks would charge higher than the floating. Banks higher higher so that they are covering the risk in future. If the REPO rates go up then banks have at least don’t make loss on your loan. For example people who have availed the loan say in 2000 with fixed and still holding it would be paying only at say 7.50% . To cover this risk they charge more.
When do you opt for Fixed rate Home Loans ?
- If the rates are upward trend then you can go for Fixed Rate of Interest. Right now the interest rates are downward trending so be on Floating and convert to Fixed later.
- If you want to be more secure and don’t want to be affected by rate changes then opt for Fixed rate. In case if you can manage your loan well , i.e make the necessary changes in the loan by making part-payments and correcting to new rates then go for Floating rate.
Disadvantage of Fixed Interest rate Home loans?
- If you want to refinance from a different bank, because they are giving a better rate then you might have to pay 2% as penalty on the outstanding amount. Where as in floating rate, there are no penalty if you are refinancing.
- If the rates are downward trending then you are at loss.
- Look into the conditions banks would apply for fixed loans, like the part-payments, increase of the EMI or pre-closure by self funding. They vary from floating rate. Normally they are free for floating rate of Interest for home loans
My suggestion would be if the loan amount is small or the tenure of loan is small then go for Fixed rate of Interest for Home Loan or else its good advice to go with fixed rate of interest and manage it well.
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