Difference Between Fixed and Floating Home Loans

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What is the difference between fixed and floating home
loans?
O loating Rate Home Loans:
4 The interest rate you are charged on a Iloating home loan is speciIied as a
deviation on a index rate set by the lender, which will change due to changes in
macro-economic Iactors such as decisions by the Reserve Bank oI India.
4 II the index rate increases, then your home loan interest rate will increase causing
the tenure oI your loan to be increased because banks try to keep your EMIs
constant. Similarly iI the index rate decreases, then your home loan interest rate
will decrease causing the tenure oI your home loan to be decreased.
4 Essentially in a Iloating rate home loan, the bank passes on the risk oI macro-
economic Iactors to the borrower.
O ixed Rate Home Loans:
4 ixed rate home loans interest rates are typically not guaranteed to be Iixed Ior the
entire tenure oI the loan. ixed rate home loans oIIer you rates that are only Iixed
Ior a Iew years, aIter which the bank has the right to increase the rate at their
discretion.
4 hen market rates decrease the rates oI Iloating rate home loans go down passing
on the beneIit to the customer, however people with Iixed rate home loans are not
beneIited. On the other hand when market rates increase the rates oI both Iloating
rate home loans and Iixed rate home loans increase (This is because Iixed rate
loans have a clause which permits banks to increase the rate at their discretion
aIter a Iew years).
4 The initial rate on a Iixed rate home loans is at least 2° more than that oI a
Iloating rate home loan

rom the above you see that in a Iixed rate home loan, you pay a higher initial interest rate Ior
the beneIit oI being shielded Irom the risk oI rate increases but you are actually exposed to these
risks anyway as the bank can reset your rate aIter a Iew years. Plus you do not get the beneIit oI
Ialls in market interest rates. This is why Iewer than 10° oI home loans being disbursed in India
are Iixed rate loans.

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