Selecting Which Type Of Interest Rate To Use – Fixed Or Variable

Once you resolve to avail a housing loan, the immediate matter that tempests your brain is choosing between fixed and floating rate of interest. It is easy to get stuck at this level if you are not financially trained.

If the media and banks are shouting about increased interest rates you make feel pressed to go and rush into fixing your mortgage rates. Your bank or financial consultant may even suggest this.

Now ideally as it should be, we assume that once you choose fixed rate plan for yourself the rate of interest will continue unaltered for the entire period you have fixed the interest rate for irrespective of any incidental increase in the same. But in reality this is not always the situation.

Here we demystify the nature of fixed interest rate home loan transaction for you so that you can make an educated decision over the subject.

* Check the small print of a loan. The bank has the right to give you 30 or 60-days notice that it intends to increase its rates.

* The bank’s first-year rates are binding on the bank only for that short period of 1 or 2 months. The 2nd-year home loan rates are not binding at all. Neither are the bank’s 3rd-year loan rates.

* Force Majeure Clause

So, while you read your home loan agreement papers, you can spot clauses like this:

“Provided further that from time to time, the bank may in its sole discretion alter the rate of interest suitably and prospectively on account of change in the internal policies or if unforeseen or extraordinary changes in the money market conditions take place during the period of the agreement.”

This is called Force Majeure Clause that enables the bank to undertake appropriate alterations in the interest rates on home loans they approve to their borrowers.

So remember to look at refinancing every couple of years so that you do not pay too much. If you select a good home loan company you can save a lot of money over the life of your home loan and in almost all cases the consultation cost is free.

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