A fixed or a floating rate home loan, which is better?

1
Which home loan is best fixed or floating
2
A fixed or a floating rate home loan, which is
better?
3
Shilpa Sharma, 44, is a mother of two and works
with an IT firm. She earns a modest income and
has been living with her parents since her
husband died three years ago. Sharma feels it is
time she bought her own house. She has approached
lenders to inquire about home loans and is caught
between choosing a fixed rate and a floating rate
loan. Which one should she opt for?
4
It is important for Sharma to bear in mind that
predicting the future interest rate is tougher
than deciding the EMI she can pay. A fixed rate
home loan, in which the interest rate is
pre-fixed for the tenure of the loan, provides a
known cash outflow for a known period. The risk
for Sharma is that she might lock in at a high
rate for a long period in the future.
5
In a floating rate home loan, the interest rate
changes as per the market rates over the tenure
of the loan. Sharma will be affected by the
change in the reference rate of interest
indicated by the bank, which, in turn, is linked
to market rates of interest. Lenders typically
adjust the tenure of the loan and keep the EMI
constant in floating rate loans.
6
If interest rates were to fall in the future,
Sharma will benefit from a reduction in her
repayment tenure. If the rates move up instead,
her repayment tenure can increase. In both the
cases, Sharma should focus on the monthly
installment and make sure that she is able to pay
the EMI comfortably and is left with enough money
to meet her other needs.
7
Which home loan is best fixed or floating, the
bank bears the risk of the rates going up in the
future, while in a floating rate loan, Sharma
bears this risk. Except in a fortunate situation,
where Sharma is able to lock in at a very low
fixed rate, a floating rate loan is a better
option as it does not try to guess the future
rates.
8
Sharma should understand that her bank may have a
better view of interest rates than her. A good
clue may lie in the pricing. Fixed rate loans may
be priced higher than floating rate loans if the
bank believes that the rates will rise. It helps
the banks to earn more as rates increase through
the floating rate option.
9
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