Choosing Between Fixed And Variable Interest Rates – Darn What A Choice!

Once you resolve to take up a home loan, the immediate thing that tempests your mind is selecting between fixed and floating rate of interest. It is easy to get stuck at this point if you are not financially trained.

Usually, when the media splashes reports on banks increasing mortgage interest rates in and their impact on Monthly Installments, you may take for granted that it is better to opt for fixed home loan rates. In fact, your banker may also counsel you to go for the same.

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

Here we demystify the nature of fixed interest rate housing loan transaction for you so that you can make an informed decision over the matter.

* Check the small print of a loan. The bank has the right to serve 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 mortgage contract, 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 sanction 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 mortgage broker company you can save a lot of money over the life of your housing loan and in most cases the consulting cost is free.

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