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Fixed interest rate on home loan

'Fixed' interest rate on home loan has various kinds; some that can be reset and one which remains fixed.

Pooja Gawde

21 Apr 2008

While the interest rates are a deciding factor in taking a home loan, we must remember that this is not a one-time decision.

Be a vigilant consumer even if you have opted for a fixed rate of interest. 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.

A well informed consumer makes better choices. So, let's try and get to the nuances of the interest rates options.

A genuine fixed interest rate is one which remains fixed during the entire tenure of the loan. It should be such that the bank does not have the power to change the rate under any circumstances. But very few banks offer actual true-blue fixed interest rates.

There are two basic types of 'fixed' rate housing loans:

  • 'Pure' fixed rates

The interest rates under a pure fixed rate loan remains constant throughout the home loan tenure. This means that the interest rates do not fluctuate with a change in the market rates.

This is unlike the regular fixed rates (fixed for 3-5 years) or floating rates where the rates are brought up for review periodically.

This is also the reason why pure fixed rate loans are costlier as compared to a regular fixed rate home loan or a floating rate loan.

However, most lenders do not offer home loans on pure fixed interest rates due to constant interest rate fluctuations in the recent times.

These are regular fixed interest rate home loans, during which the interest rates remain constant for a pre-decided time period which is mentioned in the home loan agreement. Most banks offer home loans on 'fixed' interest rate which remain constant for 3 years and 5 years.

Home loans having a 'fixed' rate for 3 years, have a constant interest rate for the initial three years of the home loan tenure, after which it is subject to review. At the end of the 3-year period, the interest rate could be aligned with the prevalent interest rates at that point in time.

Housing loans, which have interest rates, fixed for 5 years have a clause which permits their review after the initial 5 years of the loan tenure. The 5-year fixed rates are higher compared to 3-year fixed rate loan by about 0.25-0.50 per cent.