Want to take home loan – Fixed or Floating?

Earlier the public sector banks had slashed rates then last week Punjab National Bank slashed its loan rates. Then the US Fed had also slashed rates. Currently we are on the higher side of the interest rate cycle in India and the interest rate differential between US and Indian rates has widened as RBI kept its rates steady in the last credit policy. It is expected that RBI might announce a cut in rates in the next credit policy in order to narrow the interest rate differential.

Establishing the weakness of the global economy, in the short term interest rates are likely to move down rather than up. Therefore new home loan borrowers should go in for flexible rates in order to take advantage of the likely downward movement in rates.

While floating rate loans are 1.5-2 per cent cheaper than fixed rate loans (of comparable tenure). Then why to pay Rs 100-150 more per lakh of loan, and fix yourself for your entire tenure (10-20 years) at today’s high rates?

In case the interest rates are at the bottom of the interest rate cycle then only it is advisable to take home loan at fixed rates. When the floating rate is around 7-7.25 per cent, then it is the right decision to take a fixed rate loan at 8.75 per cent, then you will be the winner. Though, it is difficult to predict the bottom of the interest rate cycle. However, if you look at the last interest rate cycle and compare current rates, your call should be good enough. But the rule to follow: take a floating rate loan when rates are on the higher side and a fixed rate loan when rates are near the bottom.