The interest component of the home loans is based on either of the two types of interests or a combination of them. A series of permutations and combinations, at times, might result in a very complex structure of interest calculation.
The fixed interest rate refers to the flat rate of interest on the loan. The fixed interest rates are protected from market volatility i.e. changes in the interest rates do not affect your repayment schedule.
The floating interest rates are a little complex than its predecessor. The floating interest rates are a combination of static rates and the prevailing benchmark rates of some indexes in the economy. Let us understand through an example:
The static rate of interest: 500 basis points
The variable rate of interest: LIBOR + 200 basis points
The static rate (500 points) + The variable rate (LIBOR + 200 points) = The actual rate of interest charged
The LIBOR stands for the London Interbank Offer Rate and is the benchmark base rate for banks all over the world for lending money to each other. However, LIBOR changes with the market dynamics and is not stable all round the year. Taking into consideration the local market dynamics of demand and supply, the variable interest rates are jacked up by N basis points.
Now there’s a catch:-
The fixed interest rates can be revised by the bankers every 3 or 5 years (this clause is always mentioned in the fine print but not visbile to the naked eye). So the risk of the banker/financer is effectively not more than revision period.
There are also hybrid rate regimes like this one wherein for the first few years a fixed rate of interest is charged and then the repayment schedule shifts to the variable rate of interest regime.
Always exercise care while choosing the interest rate regimen of your home loan. Be informed and exercise the power of cuckee knowledge.