Most borrowers prefer the fixed rate because they will always know what they will be paying, even though the floating loan started at a lower rate of interest. However, home loans do not have to be just fixed or floating. The two can be combined with the amount you borrow divided into two parts; one with a fixed rate of interest; and the remainder flexible. The fixed rate segment helps you overcome interest rate increase. And if interest rates fall, the flexible rate decreases too enabling you to save money. Besides, you also get the advantage of getting lower flexible rate from the beginning.
But keep in mind that even with a fixed rate, the lender can impose a higher rate after a certain period in the event of unpredictably high inflation. Hence, it is important to read all the fine prints and ask questions before you put your signature on the dotted line. Also, look for penalty clauses. If there are provisions for penalties, discuss with the lender to reduce or even remove some of them. If you find the interest rates are uncomfortably higher try taking a loan against your deposits. This is same as borrowing from your own non-liquid assets. Your fixed deposits may be earning around 7% or so. You can profitably use this fund to get a loan and save on interest by paying may be just 2% more interest.
The fees for switching a flexible rate to a fixed one are higher than doing the other way. You can also consider repaying in advance wholly or partially in one lump-sum amount or in installments. This will enable you to not only to lower your principal loan period and considerably reduce the total interest amount you will pay. Most lenders are agreeable to this idea, and are ready to waive any penalty if you talk to them.
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