Floating, Variable, Adjustable interest rate on home loan

Home loans have a fixed interest rate as well as a floating interest rate, or what is also known as a variable interest rate. Here, we reiterate the fact that selecting the interest rate option on a housing loan is not a one-time decision.

It is in your interest to be a vigilant consumer, irrespective of the interest rate plan you choose, fixed or floating. 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.

As the name suggests, 'floating rates' are subject to market conditions, hence are constantly revised (whenever required) by the bank.

These are also known as 'Adjustable Rate home loans' (or floating rate loans) wherein the interest rate varies throughout the home loan tenure.

This option of interest rate on home loans is linked to the Prime Lending Rate (PLR) of the bank or to the fixed deposits (FDs).

As a consumer, it makes sense to opt for 'transparent floating interest rates' on home loans. This essentially means that the interest rates on the loan 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.

These loans are at least 2 per cent cheaper than a comparative tenure 'fixed' rate home loan.

There is safety in numbers. Over 90 per cent 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 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 per cent differential; you are still a net gainer.