The Reserve Bank of India recently revised its repo rate and reduced it from 4.40% to 4.00%. This revision gave aspiring home buyers an opportunity to avail a home loan at cheaper interest charges. Nevertheless, before doing so, borrowers should know in detail about the interest rate for a home loan. This rate is divided into two categories, fixed and floating.
Fixed Interest Rate
Fixed interest rate is a constant rate of interest that a borrower has to pay on his/her housing loan. This rate remains unchanged throughout the tenor of a loan. Here are the pros and cons of this housing loan interest rate.
- Rates are fixed throughout the tenor.
- Interest rates are devoid of any market fluctuations and policy changes.
- Borrowers can make a budget according to their interest repayment.
- These rates are comparatively 1.5%-2% higher than floating rates. It is mainly due to the factor that it saves borrowers from market fluctuations.
- In case of a decrease in home loan rates, a borrower still has to pay the same rate.
- Borrowers should note that in case of fixed interest rate, borrowers pay the interest at the beginning and the principal after that.
Floating Interest Rate
This home loan interest rate is directly linked to market fluctuations. It moves up and down with the rest of the market. This rate has a base component which is fixed and a variable component that is susceptible to market variations. Here are the pros and cons of this rate.
- At the beginning of a home loan, this interest rate is likely to be lower compared to the fixed rate.
- A lower interest rate means borrowers will save money until it goes above the fixed rate.
- In case of any dip in the market, this rate will go down, and borrowers can make further savings.
- Even though it goes above the fixed rate, it will be temporary, and it won’t last for the entire tenor.
- Opting for this home loan interest rate makes it harder to plan EMIs as it may go down one month and can go up the next.
- In the case of market volatility, borrowers may end up paying more.
Things to consider before choosing the type of interest rate
Choosing one or the other is not an easy task. Hence, borrowers should consider certain scenarios to get a better home loan interest rate.
- Fixed interest rate is ideal for borrowers who are comfortable in paying a definite EMI throughout their tenor. Borrowers who are not keen on taking risks associated with the market and stick to a budget should opt for this. However, it is advisable that they should try to keep their home loan EMI within 25% or less of their monthly income to avoid any difficulties paying their monthly instalments.
- Floating interest rate is perfect for borrowers who can identify the market fluctuations and predict whether the home loan interest rate will rise or dip. Also, individuals can make prepayment on their loans with floating interest rate. Thus, if they have any chances to increase their income in future, then opting for this rate is advisable.
Prospective homebuyers can check with any major financial institution to garner more knowledge on this subject.
Aspiring homeowners can also take help of a home loan EMI calculator available on the websites of lenders to make an accurate calculation of EMIs before taking a home loan.
To conclude, both these home loan interest rates have their own sets advantages and disadvantages. What is suitable for one borrower may not be ideal for another, thus making an informed decision is crucial here. Moreover, a home loan is a considerable debt; hence borrowers must make a decision according to their convenience.