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

Once you resolve to take up a housing loan, the next thing that tempests your mind is choosing between fixed and floating rate of interest. It is easy to get dumbfounded at this stage if you are not financially trained.

Normally, when news media splashes reports on banks raising home loan 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 suggest 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 unchanged 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 necessarily the case.

Here we demystify the nature of fixed interest rate mortgage transaction for you so that you can make an knowledgeable conclusion over the subject.

* Read the small print of your home loan document. You will find that the bank has the right to serve you thirty or sixty-days notice period that it intends to increase its interest 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 contract, you can spot statement 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 adjustments 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 mortgage broker 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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