Fixed vs. Float­ing rate of in­ter­est for Home Loans

What is the best bet be­tween fixed vs. float­ing rate of in­ter­est charged by hous­ing fi­nance com­pa­nies

Accommodation Times - - Editorial - By Dr San­jay Chaturvedi

Float­ing rate of in­ter­est is most pre­ferred by hous­ing fi­nance com­pa­nies since risk of ma­jor change in in­ter­est rates re­duces be­cause of fluc­tu­a­tion in the in­ter­est rates. For bor­rower, it is high risk game. In 2006 those who have taken loans on 7.5% float­ing, now it has touched al­most 13%. It im­pacts on the home bud­get and chances of de­faults in­creases. Hous­ing fi­nance com­pa­nies of­fer reschedul­ing the loan by en­hanc­ing loan pe­riod to cope up with en­hanced EMI. This is again bad for the bor­rower since he has to pay fur­ther in­creased loan ten­ure. When the rates fallen down in 2001 -2003, those who have taken loans at 16.5 % in 1999, never given the ad­van­tage au­to­mat­i­cally. One have to be per­sua­sive with the bank and beg for re­duc­tion in spite of their right for re­duc­tion. Home loan in­ter­est rates have re­cently re­duced again and have touched 9.75%. But ex­ist­ing cus­tomers will not get the ben­e­fit. This dou­ble sided poli­cies of banks will cre­ate so­cial un­rest among the bor­rower who have been left noth­ing but to close the loan and take a new with some other banks.

Fixed loan also never fixed for the loan ten­ure. Hous­ing fi­nance com­pa­nies have asked you sign a blank agree­ment where you have given rights for se­cu­ri­ti­sa­tion. The bank can sell you loan port­fo­lio to other banks. The other bank may ask you an en­hanced rate of in­ter­est or pay up en­tire prin­ci­ple amount with in­ter­est. In fact, noth­ing is fixed. The cal­cu­la­tions be­comes more com­plex with com­pound­ing of in­ter­est with con­fus­ing cal­cu­la­tions. One pays al­most 3% more in the long run of 15 years. They are al­ways kept on higher side so that cus­tomer never opt for such higher in­ter­est rate. Why the bank is so con­cern and not of­fer­ing same rate for a fixed ten­ure. When fixed rates can vary time to time for new cus­tomers, is these not a fluc­tu­at­ing rates? And when fluc­tu­at­ing rates can go high and low, then why not to have a sin­gle rate for? Ul­ti­mately both type rates changes with time. Why not to have rates which can be con­stant and also flex­i­ble. PNB Hous­ing Fi­nance had in­tro­duced such rates for the first time in the coun­try a Flex­i­fix rate to cope up with the process and give max­i­mum ad­van­tage to the cus­tomers.

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