Ms Singh, an investment banker, has been promoted this year because of her talent and dedication. She now feels fully ready to invest in a property and start living alone. After approaching some lenders for a home loan, she is deciding between a fixed-rate loan and a floating rate loan offered by them.
Which one would be ideal for her?
Considering that both the EMI outgo and repayment plan will affect this decision, one should acquire detailed information regarding fixed and floating interest rate home loans before choosing.
Often termed as ‘adjustable-rate home loan’, this particular type of home loan is linked with the benchmark rate of financial institutions. The rate keeps changing according to the changes in market trends. The benchmark or base rates are decided following the RBI guidelines, and a slight change in these rates automatically affects the rate of interest on the loan.
As the name suggests, a fixed interest home loan remains unchanged throughout the repayment tenor. This is the rate borrowers get offered at the time of availing the home loan and remain constant for the term of their loan. Typically, financiers set fixed interest rates 1%-2% higher than current floating interest rates.
While opting for a fixed interest home loan, borrowers get an idea of the EMI they will have to bear for the entire duration. This further helps in budgeting accurately and planning the finances better.
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Here is a list of advantages potential borrowers may expect from a floating interest rate home loan:
Note that financial institutions try to avoid frequent revisions to your EMI even if interest rates fluctuate due to the change in market trends. That is why your repayment tenor gets adjusted when floating interest rates increase. However, you can still go ahead and request the lender to revise the EMI instead of the tenure.
Here are some perks that a fixed interest home loan comes with:
Owing to the sense of certainty this particular type of interest rate brings while opting for high-value home loans, you get to manage your financial liabilities conveniently. However, keep in mind that in the case of long-tenure credit facilities, some lenders switch from fixed rates to floating interest rates after a few years. Make sure to go through the terms and conditions to avoid such confusion.
Certain limitations of floating interest home loans are given below:
In this case, too, you will find some limitations, have a look:
As a potential home loan borrower, you can opt for a floating interest home loan in the following circumstances:
You should choose a fixed interest home loan in the following situations:
Navigating the home loan market can be tricky, especially with so many variables. Therefore, you need to pick a dependable financier to maximise the benefits of secured credit facilities like home loans.
As you can see, both the fixed and floating interest rate home loan has certain advantages as well as drawbacks. However, while deciding, assess your repayment capacity and choose the option that does not affect the overall home loan cost. Also, compare different lenders and their offered interest rates. Download the Navi app to find attractive deals!
Is there any prepayment penalty on floating interest home loans?
No, if you decide to prepay your home loan, which was taken at a floating interest rate, you will not have to bear additional charges. However, make sure to discuss the same with your lender before availing the loan.
Can I shift from a fixed rate of interest to floating interest rate?
Yes, you can switch to floating interest rate if you availed a home loan at fixed interest rate or vice versa. However, keep in mind that most of the lending institutions levy a nominal conversion fee for this.
Is a fixed interest home loan the best option for a 40-year-old borrower?
For individuals who are of age 40 and above, the remaining repayment tenure should be up to 20 years. It is ideal to opt for a fixed interest rate home loan if the rates are lower at that point.
Does floating interest rate depend on the change of repo rate?
Yes, the repo rate is one of the factors
responsible for the change of floating interest rate. For instance, if the RBI decides to slash the repo rate, floating interest rates will inevitably come down.
Can I opt for pre-sanctioned offers while choosing a floating interest rate home loan?
Generally, interest rates offered by financial institutions while extending pre-approved offers remain fixed. It is ideal to discuss with lenders whether you can shift it to a floating interest rate in the future.
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