One must make a series of decisions to have a house of their own. The first is whether to rent or buy a house. If that is in favour of buying, the next decision involves finding the perfect home. And then arises the crucial decision of fixed vs. floating interest rate home loans. Choosing wisely between the two is vital because the type of interest rate can impact the Equated Monthly Instalment (EMI) amount and affect the repayment schedule.
Here is what one needs to know about different housing loan interest rates to make a suitable decision.
What is a Fixed Interest Rate?
A fixed interest rate does not change throughout the loan repayment tenure. It is determined at the time of sanctioning and loan approval by the bank. This type of home loan interest rate does not fluctuate with changes in inflation rates. As a result, the EMI remains the same throughout the tenure. Generally, fixed interest rates are 1% to 2% higher than prevailing floating interest rates.
Borrowers generally tend to choose fixed home loan interest rates on long-term housing loans as it is easier to plan monthly budgets and long-term financial savings or investments more accurately. Since the associated risk is lower with fixed rates, one can enjoy a sense of financial security and stability. But it is vital to remember that fixed home loans have a prepayment penalty.
When is Choosing a Fixed Interest Rate Ideal?
A fixed interest rate is suitable when the borrower is comfortable with the EMI amount and does not want any surprises. Moreover, if one expects the interest rate to rise in the future, a fixed home loan interest rate can help in locking in the current interest rate offered by the lender. However, it is important to note that the EMI should not exceed 25% to 30% of the salary to ensure its payment on the due date without difficulty.
If you are looking for a luxury home with a fixed interest rate on the housing loan, Piramal Realty is offering a fixed home loan interest rate of 6.85% across all of its projects until 2024.
What is a Floating Interest Rate?
A floating-rate home loan or adjustable-rate home loan is linked to the lender’s benchmark rate, which is affected by the market interest rate. Any change in the benchmark rate changes the loan interest rate proportionately.
The lender outlines a calendar period to change the floating interest rates of the loan. This period can be every quarter or in the middle of a financial year. It can also be distinct for each customer depending on the date of the first disbursement of the home loan. If there are fluctuations in the market rate at the time of the period review, the interest rate is reset. When the interest rate changes, it directly impacts the tenure date.
The loan tenure increases if the market rate increases and vice-versa. There is usually no change in the EMI as that can inversely affect the borrower’s cash flow, making it difficult for them to pay the dues on time. But the borrower can increase the EMI instead of the loan tenure as per convenience.
Who Should Choose a Floating Interest Rate?
Floating home loans are favourable when market interest rates are likely to decline. If the home loan tenure is five years or less, choosing a lower rate with a lower floating interest rate is better. These floating interest home loans also do not have a prepayment penalty, allowing one to prepay a few EMIs in one go when the interest rate falls.
Fixed vs. Floating Interest Rate – Which is Better?
The choice between fixed and floating interest rates depends on the borrower’s needs, preferences, and financial profile. If there is any confusion regarding the floating rate meaning, one must reach out to the lender and get a better idea of how the rates will impact their repayment schedule.
Since it is challenging to predict future home loan rates, borrowers can also choose a combination loan that is partly fixed and partly floating. Several financial institutions and lenders allow one to switch between fixed and floating interest rates at any point in time. A nominal fee is charged for this facility.
Before securing a loan against a property, one must inquire about the home loan interest rate, as it can affect homeowners for years or even decades. Fixed interest rates are ideal for individuals who have stable monetary support with the ability to fund the loan in a short tenure. Borrowers who can tackle market risks over a long period can opt for floating interest rates. Remember there is no right or wrong choice, and buyers must assess their budget and repayment capacity before deciding.
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