Home Loan-Fixed or Floating Rate? - By: Habibulla

Interest rate is one of the important factor for home loan seeker. This is the reason they often ask whether to opt for a fixed rate or floating rate home loan. Firstly, it is important to understand what is the difference between fixed and floating rate home loan.

For the fixed rate home loan, the interest rate will remain fixed during the entire term of the loan. For instance, if you take fixed rate home loan for a 20 years at 8% per annum. This rate will remain same for the entire term, even market interest rates goes to high level. Floating rates are directly linked to the prevailing market rate of interest. This type of interest rate always fluctuates during the term of the loan.

The fixed rate is right option for those who wants a fixed monthly repayment in the sense of security. If the interest rates comes down, the fixed rate home loan doesn't get the benefit of the reduced rate and borrower has to pay the same amount to the lender. Floating rates home loans are at least 1- 2% cheaper than fixed interest rates. If the floating rates goes higher, but it will be for a few period.

You can also decide by comparing the current fixed and floating rates offered by the lenders. Currently, very few lender offers fixed rate for the entire term. Most fixed rates schemes adjust to the floating rate scheme within a 2 year period from the inception of the loan. Since last year, many lenders are offering an approximately 8.5% fixed rate scheme for 2 years, which will then get reset after 2 years. The scheme can be available for 5 year period also.

A well informed person can make right choice for home loan. So, it's always important for you to analyze the current market trends to have an idea about the home loan interest rate.

About the Author

Habibulla Antule is a financial advisor and consultant and have provided his expertise to many financial institutions for loans and insurance

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