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Oct 03, 2012, 02.41 PM IST | Source: CNBC-TV18

Home loans: Should you choose fixed or floating rate?

One of the common dilemmas for any loan seeker is whether to choose a fixed rate home loan or a floating rate home loan. Anil Rego of Right Horizons points out the difference.

One of the common dilemmas for any loan seeker is whether to choose a fixed rate home loan or a floating rate home loan. Anil Rego of Right Horizons points out the difference.

“Go for a fixed rate home loan when you find that interest rates are likely to go up and you want to cap your home loan interest rate at the current rate. In case you feel that interest rates are on the downward spiral then it is a good idea for you to go for a floating rate loan,” Rego advises.

In the current environment, since interest rates are already at a peak and fixed rates are higher, it doesn’t make sense to go in for a fixed rate, he added.

Below is the verbatim transcript of the interview

Q: When would you advise people to go through a floating rate home loan and when should they prefer a fixed rate home loan?

A: Go for a fixed rate home loan when you find that interest rates are likely to go up and you want to cap your home loan interest rate at the current rate.

In case you feel that interest rates are on the downward spiral then it is a good idea for you to go for a floating rate loan. In the current environment, there is a lot of talk about easing of interest rates, various government actions and RBI actions. Interest rates are on the higher side right now so it makes sense to go in for a floating rate loan. Till such time one sees that interest rates going up, it is good to just lock it into a fixed rate.

Q: Given that the term for most home loans is 20 years, there will be several cycles of up and down. Also, when you want to prefer the fixed rate, it always comes 2 per cent points higher than the floating rate. Do you have any advantage in going to the fixed rate?

A: Interest rates move a reasonable bit. Personally, I have a fixed rate loan at 7 per cent. If you get it right then it is really good. Typically, a fixed rate loan is costlier by about a per cent or so. So you need to just watch out and fix it at a rate, which you are comfortable with. Otherwise in the current environment, since interest rates are already at a peak and fixed rates are higher, it doesn’t make sense to go in for a fixed rate at this point of time.

Q: An investor took a home loan in 2007 at roughly 10 per cent fixed interest rate. With the rates likely to come down, should he switch to floating rates and what are the costs involved?

A: He is lucky to at least have a 10 per cent rate, and when interest rates went up, he did not participate in the higher interest rates. Now he is at a beneficial point where he can see if interest rates go down further. From here, if it goes down by about 0.5 per cent, considering that he has a fixed rate loan, he will have processing charges for a new loan as well as he will have some bit of a pre-closure charge. He has to work out the math, and if it is more than 0.5 per cent then it would actually make sense for him.

He can also go back to his same bank and ask them at what cost he can move over to a floating rate loan. Sometimes they end up charging a bit of a processing fee and allow the switch and you maybe able to get something, which is a win-win situation. If interest rates go down much further then he always has the option of again fixing it at a fixed rate loan.

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