Should you switch to a fixed-interest Home Loan as rates rises?

While availing of home loans, the fixed vs floating home loan interest rate debate often leaves homebuyers in a dilemma. Most opt for floating interest rates, simply because the rates are lower than the home loan fixed interest rate. However, floating rates come with uncertainties. What happens if the interest rate starts to rise unexpectedly? What should you do in such scenarios? This blog will help you understand the difference between floating and fixed-interest rate home loans.

Home Loan Interest Rate - Fixed or Floating

Wondering what is a fixed interest rate home loan and how it differs from a floating rate loan? A fixed interest rate means that the home loan interest rate will remain constant throughout the loan tenure, as determined during loan approval. In contrast, a floating interest rate loan implies that the home loan interest rate will change subject to the changes in the repo rate set by the government or RBI (Reserve Bank of India). It is crucial to carefully review the home loan agreement.

Here’s a quick comparison between home loan fixed interest rates and floating interest rates:

What to do during rising Interest Rates?

WIf inflation rises significantly, the government may increase the interest rate to reduce borrowing and control spending. This lowers demand and helps control prices. However, borrowers with long-term loans, such as home loans, may see their borrowing costs rise. This is where understanding home loan amortization becomes important. A question emerges – whether such borrowers should shift to fixed rate home loans in such a scenario?

You should evaluate this scenario based on the following parameters:

• Loan Tenure: A fixed interest rate is ideally suitable for short-tenure loans, while floating rates are more favorable for long-term loans. If your home loan has a long remaining tenure, you might want to stick with floating rates.
• Rate Difference: You should check the difference between a home loan at a fixed interest rate and a floating interest rate. For some banks, the difference may be small (1%-1.5%), while for others it could be significant (2%-3% or even more). Many borrowers choose floating rates for this reason.
• Future Probabilities: What are the future probabilities and possible government policies? Is the rising interest rate trend to be continued, or is it a one-time action by the government? These questions will help you decide whether to shift to a fixed interest rate or continue with the floating interest rate.

In a Nutshell

During times of rising interest rates, shifting to the fixed interest rate option seems attractive. However, it is important to consider the above factors before you shift as your decision carries financial consequences. Making the right choice and being patient and aware is better than choosing short-term gains due to fluctuations. Further, it is important to have the right lending partner that provides you with flexibility and convenience.

IIFL Home Loans provides you with home loans at one of the most affordable interest rates and flexible tenure. You can also use the IIFL Home Loan calculator to estimate the interest outflow as well as monthly EMI payments to be made.