The biggest advantage of a floating rate home loan is that it usually will match the prevailing rate of interest in the markets. So, if interest rates fall in the economy, like they have been between 2006-09, then the rate of interest on the housing loan also falls. Accordingly the EMI will be also change.
Floating rate home loans are the only type of loans that are available in India to finance a house purchase, because most banks don’t offer a fully fixed loan. Historically, India has had a volatile interest rate scenario, so banks and lenders were shy of giving fixed rate loans when their own costs of funds would vary because of sudden changes in interest rates. Now, after the RBI’s recent announcement of a shift to a Base Rate Regime, one hopes that there will be more clarity on how floating rate loans get priced.
A disadvantage of floating rate home loans is that the EMI amount can be revised upwards, without the borrower having any say in it. Its quite possible that if rates rise, the EMI will also rise and the borrower might find it challenging to meet the higher EMI payment from their monthly budget. So, floating rate home loans can catch borrowers by surprise.
This message was edited 1 time. Last update was at 05/03/2010 13:13:38
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