Interest rates are one of the most important aspect to consider before taking on a Home Loan since they directly impact how affordable it is for you. However, the type of interest rate to choose can cause a bit of a dilemma. Here are the pros and cons of both fixed and floating Home Loan interest rates, so you can make the best choice for your Home Loan.
Fixed Floating Rates and Why They may Work for You
As the name suggests, fixed interest rates remain constant for the entire tenor of the loan. If you would like to be able to budget your monthly expenses in advance, a fixed interest rate loan is the best option for you. This is especially true for housing loans, since they tend to have longer repayment durations and therefore warrant more planning than other types of loans.
It is important to remember, however, that most financial establishments, in order to protect themselves against market fluctuations, will set their fixed interest rates slightly higher than their floating interest rates. So one disadvantage is that you may potentially end up paying more interest on a fixed rate loan.
Floating Interest Rates and Why They may Work for You
A floating interest rate fluctuates according to fluctuations in the market. In a good month, this could mean you’re paying a significantly lower EMI than what you would be paying for a fixed Home Loan rate. But, if market fluctuations cause the interest rates to rise, you could find yourself shelling out a lot more than you ordinarily bargained for.
Calculating your monthly budget may also be a lot trickier, and if you’re a stickler for pre-planning this may not be the way to go. For short tenor housing loans, however, floating interest rates are a good option since interest rates will typically not undergo a significant rise in a short span of time.
Time-bound Fixed Rates
Several financial institutions now offer time-bound fixed interest rates. This means that for the first portion of the loan tenure—an amount of time decided upon by the institution in question—the interest rate is fixed, after which it is susceptible to change according to market dynamics.
Opting for this Home Loan rate can prove beneficial for you depending on the market. If interest rates were to rise during your fixed-rate term, you’d be saved from paying the higher interest rates; if they were to drop, however, you would not benefit from the lowered rates. However, choosing this interest variety does give you more flexibility, offering you fixed rates in the beginning when you are getting used to paying Home Loan EMIs and then working as per the market.
How the Market affects your Interest Rate
Interest rates are typically fixed based upon the repo rate and the MCLR set by the RBI.
A floating interest rate will take this rate plus a spread that lenders charge based on its internal calculations. In a floating interest rate, the borrower accepts the risk of a raise in the base index of repo and MCLR; in the case of fixed interest rates, the financial institutions bear that risk. This is why fixed interest rates tend to be higher.
Using this knowledge, you can apply for a Home Loan as per your selected type of interest rate. No matter what you opt for, you have the option of switching your Home Loan to a new lender if you find that lower rates are available in the market. Whatever you do, don’t forget to use an online Home Loan interest calculator to help you calculate your potential EMIs to plan your repayment in advance.