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Floating vs fixed: what’s your pick?

Most banks have either increased or are in the process of revising their floating rates for home loan borrowers, reports Sandeep Singh.

business Updated: Jul 06, 2008 22:43 IST
Sandeep Singh

Most banks have either increased or are in the process of revising their floating rates for home loan borrowers. Chances are this may not be the last of hikes, according to top bankers.

Such an outlook might make new borrowers tilt for a fixed rate, given that many of the existing borrowers have seen their loan burden rise sharply since the Reserve Bank of India began monetary tightening about two years ago.

Experts, however, say going for a floating rate still makes sense, because it might go up a notch or two for now, but will surely fall thereafter.

“It does not make sense to lock into a fixed rate loan at current high levels of 13-14 per cent for the long-term,” said Surya Bhatia, a Delhi-based financial planner.

A home buyer should always keep in mind that he is buying a loan for a long term —10, 15 or 20 years. Home loans are currently available at a floating rate of 10.5 to 11.5 per cent for new borrowers, while fixed rate loans are quoting between 13 and 14 per cent. “Over a period of time (floating) interest rates will come down,” said Amar Pandit a Mumbai-based financial planner.

If the floating rate rises from 10.5 to 13 per cent over the next three years, the total EMI paid by a customer in that period would be Rs 7,76,082, whereas a fixed-loan customer, paying interest at the current 13 per cent, would have paid Rs 8,43,516 in EMIs. The former would thus save Rs 67,000.