Floating rate or fixed rate for a home loan?

If you are in need of a home loan, you have two options-fixed rate or floating rate loan. Both are offered by all major commercial banks and housing finance companies. A fixed rate loan comes with a fixed interest rate for a fixed time period. Floating rate offered by banks is linked to marginal cost-based lending rate (MCLR). And whenever the MCLR fluctuates, your home loan rate will change too. Mint explains how to choose one.

Interest Rate
Usually the interest rate on fixed rate loans is higher than on floating rate loans. For instance, ICICI Bank Ltd offers a rate of 9.40-9.45% for up to Rs5 crore loan on floating, whereas for fixed rate loans the interest rate is 9.40-10.10%. Similarly, HDFC Ltd offers floating rate loan at 9.40-9.95%, while fixed rate loan on 9.50-10.25%.

Floating: good

Fixed: bad

EMI Predictability
For fixed rate loans, you will know the exact fixed equated monthly instalment (EMI) that you need to pay. You can consider this if you prefer predictability in repayment. Here you don't have to keep a tab on the changing interest rate in the market. In case of floating rate, when the interest rate changes, EMI can change too.

Floating: bad

Fixed: good

Prepayment
Home loans come with a longer tenure of up to 30 years. But, if you have surplus funds, you may want to prepay the loan. Floating-rate loans come without any prepayment penalty. Fixed-rate loans have a prepayment penalty, usually 2-2.5% of the outstanding principal amount. It also depends on when you are prepaying.

Floating: good

Fixed: bad

Switching
In case of a home loan you have the option of switching your loan, if you want to move to a cheaper loan within the bank or to another bank. The fee for switching from one loan to another varies. Usually switching from a fixed rate loan is more expensive than in a floating-rate loan, almost by 50-200 basis points.

Floating: good

Fixed: bad

In arrangement with HT Syndication | MINT