To Fix Or To Float?

When applying for a home loan, opting for interest rates is a cause of dilemma. Should one opt for ‘floating’ or ‘fixed’ rates of interest?

Interest rates have been fluctuating since the last 6 years, so much so that the consumer is not sure of the future.

In March 2000, the interest rates on home loans were about 14%; which started falling quite steeply. By the last quarter of 2003, the interest rate (floating) on home loans fell to 7%. Again the loan interest waves have splashed to a high of around 10.00% (floating rate of interest) in January 2007. This hike is dramatic; considering that it is a jump of 3.50% since the historic low of 7% reached in 2003.

This uncertainty makes the question a million dollar one. What should a home loan consumer do? Should he go in for a floating rate home loan? This could mean a home loan at a cheaper rate with an inherent risk of being hit by a huge increase in interest rates in the future. Or, should the consumer seek the safety of a fixed rate home loan. This effectively means that he could be paying a huge premium today?

While the interest rates are a deciding factor in taking a property loan, we must remember that this is not a one-time decision.

Be a vigilant consumer even if you have opted for a fixed rate if interest. As a matter of practice, assess how the markets have moved in a six-month period and consider the costs and benefits of changing your decision.

A well informed consumer makes better choices. So, let’s try and get to the nuances of the interest rate options.

A true-blue ‘fixed’ interest rate is one which remains fixed during the entire tenure of the loan. It should be such that the bank does not have the power to change the rate under any circumstances. Very few banks offer actual true-blue fixed interest rates.

Unlike the ‘fixed’ interest rates on the home loans; floating rates will be changed by the bank. As a consumer, it makes sense to opt for ‘transparent floating’ interests on housing loans. This essentially means that the interest rates should move downward when general interest rates register a fall and move up when the general interest rates move up.

To check whether the bank offers a ‘transparent floating interest rate on home loans’; request for its record of benchmark rates in 2002 and 2003. This data will help you gauge whether the bank has actually passed on the benefit of reduced rates to its existing consumers at the time when the lending rates had fallen rather dramatically.

Andromeda strongly recommends the option of ‘transparent floating interest rates on home loans. Our choice is based on certain criterion:

These loans are at least 2% cheaper than a comparative tenure fixed rate housing loan.

There is safety in numbers. Over 90% of the home loan consumers opt for floating rate loans. This is a potent and large community which the politicians can ill afford to ignore (witness the imbroglio when the PSU banks tried to raise their home loan rates) and hence a dramatic increase in rates in a short time is very unlikely.
If you go in for a transparent floating rate home loan, you also get the benefit of reducing interest rates as (not if) and when the interest rate cycle turns and commences on its downward journey. Even if the interest rates rise, in the interim as long as they do not rise above the 1.00% differential; you are still a net gainer.

Andromeda advises you to go in for a transparent floating rate loan unless, you want to play it completely safe and are willing to pay the premium (in terms of high interest rates) for such safety. In any case, signing a fixed rate loan; that is not a real fixed rate loan makes no sense, whatsoever.

So, float; but with transparent rates.