FIXED OR FLOATING?

FIXED OR FLOATING?

Should you opt for ‘fixed’ rate or ‘floating’ rate on your housing loan? A comparison between the two options will probably help you decide. 

Floating Rate	Fixed Rate
It is a rate linked to BPLR of the bank. It means that with every change in BPLR, the Floating rate moves up or down	It is a rate that remains fixed for a particular period. Normally, banks always insert a clause enabling them to review the fixed rate after a particular period – once in 3/5 years. It varies from bank to bank.
If there is a rise in BPLR, banks will either increase your EMI or the period of repayment. Assuming your present EMI is Rs 10000 for 10 years. A rise in BPLR would result in one of the following:   1)EMI would be more than Rs 10000 or 2) Period of loan would be more than 10 years depending on the rise in BPLR. Either way, it hurts your finance	A rise in BPLR will not affect your EMI. But this protection from BPLR hike is available only till the next review period. If the review period is 3 years and if you have availed HL on 01.01.07, your EMI would be constant till 31.12.09. Any upward revision in BPLR between 01.01.07 to 31.12.09 would not affect your EMI.
If you are about to go for HL and if you compare the two rates, you will notice that Floating rate is always less than the Fixed rate. If the floating rate is 10.25%, fixed rate for the corresponding period would most likely be as high as 13% to 14% (varies from bank to bank). This means:
If you opt for floating rate	If you opt for fixed rate
You would be paying less interest @ 10.25%	You would be paying higher interest from day one @ 13% or 14%
Your EMI would be less until the revision in BPLR	Your EMI would be higher and would remain so until the next review of BPLR
You are subjecting yourself to market volatility. Your EMI might go up or down depending on revision in BPLR	BPLR would be normally reviewed once in 3 to 5 years. You are subjecting yourself to fixed EMI for 3 to 5 years and after 3/5 years – review period – EMI might go up or down. Thus the protection from higher interest is only up to the next review period.

In case you are purchasing ready-built house/constructing new house with the intention of selling after some time, it would make sense to opt for floating rate as it would be less than the fixed rate.

With the advent of what RBI calls ‘teaser rates’ – where the housing loan carries lower interest for the first year which then is hiked gradually in subsequent years, the borrowers really need to do a lot of homework. You need to understand that the ‘teaser rate’ is only for a limited period and get your maths right to factor the incremental EMI in the subsequent years once the period of ‘teaser rate’ is over and accordingly plan your budget.