A home loan is probably going to be the biggest and longest liability you will ever take on.
One of the most important factors in taking a home loan is the interest rate.
This is what will determine your cash outflow every month, for a number of years.
Wondering whether you should opt for a fixed or a floating or take a hybrid loan? Let us help.
There are 3 types of home loans available: fixed, floating and hybrid.
A Fixed is one where the interest rate charged is supposed to be constant over the loan tenure.
A Floating is one where the interest rate changes based on a specific benchmark rate, over the tenure of the loan.
A hybrid / dual rate is a combination of fixed and floating rates loans where some proportion of your loan is fixed and the rest is floating.
The recently introduced teaser rate home loans are a type of hybrid loan - where they offer you a fixed rate for the first few years ( 1 to 5 years) and afterwards the rate reverts to the standard floating rate.
These are called teaser loans because the rate for the first few years is low (currently between 8 and 9.
50%) and thereafter it becomes floating i.
e.
around 12% or more.
Now for some nitty gritties: 1.
Is a fixed home loan really fixed? No.
The rate isn't really constant for the whole duration of your loan.
The rate is 'fixed' for a period of time - say 3 years or 5 years, and the lender can then change the rate, to keep it 'fixed' again, for the same period of time.
So, in case interest rates have risen significantly, your lender can revise your rate upwards too.
2.
When is a fixed loan better? A fixed loan works well when the fixed is low i.
e.
when the economy is at the bottom or close to the bottom of an interest rate cycle.
That's when you can lock in a low fixed interest and benefit from it, atleast for 3 to 5 years when the rates can be revised by your lender.
The time you should not opt for a fixed loan, is at the top or close to the top of an rate of interest cycle, when rate of interest are high.
And remember, the rates can change in a few years anyway, so actually, there is no fixed rate.
3.
When is a floating better? A floating home loan is the more popular option because when market go down, floating rate owners get the benefit of the fall in rate of interest.
This is one of the reasons the majority of people taking a home loan go for floating rather than fixed rate loans.
Another big factor in favour of floating rate loans is that they are usually available for about 1% to 2% lower than fixed rate loans.
4.
What happens to a floating loan when rate of interest change? If you have a floating rate home loan, and interest rates go up, then either your EMI will increase, or your loan tenure will increase and your EMIs remain constant.
Similarly, if rates go down, then either your EMI will decrease, or your loan tenure will.
5.
I have already taken a fixed home loan, can I convert it to a floating home loan? Yes - the bank will charge you a nominal fee but you can certainly convert from floating to fixed, and also vice versa.
6.
What should I choose today - a fixed, floating or hybrid? In today's scenario, interest rates are close to a peak so both a hybrid and a floating rate home loan would benefit you when interest rates fall.
But specifically, a hybrid home loan would be more beneficial because you can take advantage of low rates for the first couple of years, and then let your rates float.
Please note, you should look into the details of your specific loan very carefully before opting for it.
Also, you should be sure that when the low interest rate period is over and you move to a high interest rate, your cash flows can sustain the increased outgo on EMIs.