Lets first understand what they mean. Very few banks offer the true "rate" housing loans, which remain "fixed" during the entire term of the loan. In most cases, the "rate" home loan will mean that the "fixed" rate will remain fixed for 3-5 years, and eventually that will be re-bid to reflect the then prevailing rates. Obviously, you risk paying higher rates to such re-pricing, and thus these loans can not be called "fixed rate" loans by any stretch of imagination.
Most home loans to consumers (more than 99%), currently taking a variable rate loan. They are taking right decisions, but perhaps for the wrong reasons. Let us examine it more closely.
We have a variable interest rate loans for 15-20 years tenure (which is the most popular loan tenure the band) are available at around 7.50% real "rate" home loan for the same tenure are available from any nationalized bank at 8 , 50% per annum for 20 years lease for a variable rate loan in order to Rs.806 per Rs.1 easy loans (interest rate to 7.50%) compared to the EMI of Rs.868 for a "rate" home loan at 8.50 %. For most consumers the benefit of lower pre-EMI itself makes the decision easier because they do not do a detailed analysis of the risk involved in signing a variable rate loan if interest rates go up.
The main argument for paying this premium (Rs.868 per nail by nail minus Rs.806 = Rs.62 per month easy credit) for a fixed rate loan is based on the assumption that the current round of rate cuts do not can not last forever, at one point, the lowest rate seen in the history of India in the home loan industry will be upward. Long lease a home loan, the argument goes on - taking risks is open as it is not recommended .
Counters this argument:
This is not a single decision you need to take as a consumer. You can always switch from variable rate loans to fixed rate loans in the future to pay upfront cost. (Of course, the fixed rate at the time the switch will apply). In the meantime you can enjoy the benefit of lower interest rates on variable rate that, at that time prevailing fixed interest rate would have climbed much higher. Hence the call to be taken is whether interest rates will rise during the term of home loans, but they are likely to rise above 8.50% + annual rate that exists for a true "fixed rate" home loans today.
Benefit of lower variable rate is available when the main much, if any, of the higher rate will apply at a lower principal. We also lease in which higher interest rates will be applied will usually be lower than the agreed because the most advance and prior to the lease.
The most powerful counter-argument, however, much stronger. It is based on "safety in the herd" principle. Most banks have been less than transparent in passing on the benefits of reduced interest rates over the last 2-3 years has helped mainly due to the lack of regulatory enforcement and customer inertia. Although it is tolerated by consumers, they will rebel when interest rates start to rise (if not), and increased EMI starts to bite in 30 easy household budget.
Given the above consideration we believe that, at present, fixed rate loans should be considered only if the difference in interest rate with comparable tenure variable loans is 0.50% or lower. But this advice is based on the current set of circumstances and needs to be constantly reviewed in the light of any new developments.
