Getting a Home Loan is quite easy these days. But choosing the right one is difficult. A dilemma that almost every home buyer faces is choosing between a fixed or a floating Home Loan interest rate. To find the answer, there are a number of factors that you need to consider.
The basic consideration when securing a loan is the interest rate. Every lender asks the borrower about his or her choice of fixed or floating interest. If you do not differentiate between the two, the lender may take you for a ride. So, let us first understand the differences between a fixed and a floating interest rate Home Loan.
Fixed Home Loan Interest Rate
As the name suggests, fixed Home Loan interest rates offer fixed monthly instalment for the entire tenure of the loan. Going by the volatility of financial market, the housing loan interest rate on your Home Loan is almost certain to change. However, if you go with a fixed interest rate, then you are immune from this volatility. You can set aside a fixed part of your budget every month for the EMI.
- There are disadvantages of this scheme that you must consider. Generally, the fixed rate is higher than the floating rate by at least 1 percent.
- It varies from one lender to another and may go up by as much as 2-2.5%. Moreover, you are very likely to lose out on lower interest rate regimes.
- If and when there is a downward revision in interest rates the interest rate comes down, you would not be able to enjoy these benefits since you opted for fixed rate.
Floating Home Loan Interest Rate
If you select a floating rate, you will pay variable interest rates which depend upon the prevalent market trends.
- As the interest rate variates in accordance with rate revision by the RBI, your EMI would also vary.
- Floating rates depend on the Prime Lending Rate of Home Loan interest rates in India prevailing in the market.
- While this gives you the benefit of pay less, it also carries the risk of paying more. So, you should choose your interest rate regime carefully.
Read Between the Lines
Some banks or lenders may try to cheat borrowers by keeping the interest rate fixed only for a few years. After this period they may move into the floating rate regime for the rest of the tenure. This obviously suits their interest. Make sure to read the contract thoroughly so you don’t fall for these tactics. You may end up paying a higher interest when the rate is lower and then pay a higher rate when the rate is higher.
Benefits of Floating Home Loan Interest Rate in India
- A big benefit of floating rates is that the interest rate is almost always lower than fixed rate. The difference between the two rates can be as much as 1 to 2.5% depending on the lender.
- Your floating rate EMI will be lower compared to the EMI in a fixed interest rate scheme.
- Add to this the benefit of downward revision of rates. As and when the interest rate comes down, your EMI also comes down.
- Even if the rate goes up, it would not affect you since you are already paying lower than fixed rate.
- As interest rates don’t come down or go up by big margins, your EMI is not likely to increase by big margins even if there is an upward revision in rates.
- You can use a housing loan interest calculator to find out your interest due. In the short-term, it may not even go up to the level of the fixed rate.
- Even if the rate goes above the fixed rate for a while, there is always the likelihood of the rate coming down in the future.
- If you take a loan for a term of 20 years or more, you may make some savings in your housing loan interest over the entire span of the loan.
It is generally seen that a floating Home Loan interest rate suits the most if you take a long- term Home Loan. To reap the greatest benefit from these, you should evaluate prevalent market trends and decide upon the housing loan interest rate that is best for you. Whichever rate you choose, Home Loans are one of the best financial options for building a residence. We advise you to research the market and select the one that fits you perfectly.