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The dilemma in home loans: fixed or floating interest rate?

The decision to choose between a floating rate and fixed rate home loan has always been an important one for borrowers. This topic has been discussed widely and if you do a Google search, you will get some inputs on this. Having said that, it needs a proper perspective. First, let’s get the basics clear.

Floating rate means that the interest rate you are paying now is a function of the rate environment today. Subsequently, as interest rates in the economy move up or down, the rate you pay will move up or down accordingly.

Hence the name ‘floating’ i.e. it floats with some reference benchmark. A fixed rate home loan is a tricky term. While from the name it seems that the interest rate is fixed, there may be a clause in fine print that the loan provider may raise the rate at some point, triggered by some development.

This may be referred to as the so-called fixed or floating-fixed rate home loan, where the interest rate is not as fluctuating as floating, but may fluctuate under certain conditions. Then there is the fixed rate loan, which may be referred to as proper fixed or fixed-fixed rate loan, provided you go through the document or consult a legal professional.

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