Buying a home is a dream-come-true for most of us and a time to usher in new beginnings. However, buying a home is a no mean task, and involves a bunch of decision making which can have a massive impact on your financial future for a long time to come. One such decision that requires careful consideration is picking a lender and subsequently the interest rate while zeroing in on a particular Home Loan product.
While looking at Home Loan Interest Rates, you have two options – either to opt for a Fixed Rate Home Loan or a Floating Rate Home Loan.
A fixed-rate Home Loan can be described as a Home Loan where the interest rate is fixed – irrespective of market conditions – over the entire tenure of the loan. On the other hand, a floating rate Home Loan tends to vary– either upward or downward– according to market conditions and accordingly, the interest rate on such loans is reset at specified intervals.
While both interest rates have their own pros and cons, let’s specifically take a look at what floating rate interest Home Loan is and understand its various benefits.
A floating interest rate – also referred to as an adjustable-rate Home Loan or a variable interest rate. It is a Home Loan which experiences fluctuation in the interest rates depending on the market movements. These Home Loans have a base rate which will be notified by the financial institution to the customer at the time of the loan getting approved. Whenever there’s a revision in the base or benchmark rate – as per the prevailing market dynamics – the floating rate will also be adjusted proportionately.
Floating rate Home Loans have a direct impact on the EMIs outgoes which are made towards the repayment of the Home Loan, and thereon eventually, affects the total interest repayment as well. It also needs to be mentioned that these interest rates are revised or reset accordingly by the banks and NBFCs as per RBI guidelines. This could happen every 3 months, on a six-monthly basis or you might even get allotted a custom date depending upon the day your Home Loan was first disbursed. In some cases, the reset date could also be set as your first loan anniversary.
Accordingly, any changes in the market rates during the period where the interest rates are reviewed – whether higher or lower – will accordingly get passed on to you and subsequently adjusted as well. In the event of a reset, more often than not, it’s the loan tenure that tends to get re-adjusted to account for the change in the interest rate. For instance, if there’s a decrease in the interest rate, your remaining tenure of the loan would be lowered. The reason behind this is to avoid a scenario wherein your cash flows get affected owing to the frequent revisions in the EMIs. That said, you can also request the lending institution for a change in the EMI instead of an adjustment to the tenure.
Here are some of the main benefits of adopting floating interest rates:
Undoubtedly, one of the biggest pros of going for a floating interest rate Home Loan such as one offered by Central Bank of India Home Loan is that you will enjoy a lower rate of interest vis-à-vis fixed-rate Home Loans in all likelihood. Floating rate interest rates in India currently range between 9.85 % to 11.75 %, basis lender’s credit policy. The below-mentioned illustration can help you understand the difference with more clarity.
Say, you have availed a Home Loan of 40 Lakh for 10 years. Let’s also assume that the floating interest rate offered is 10 percent, and the fixed rate of interest offered to you is 11 percent.
If you choose to opt for the floating rate of interest, your EMI will come up to Rs. 52,860. However, if you had opted to go with the fixed interest rate, then your EMI would total up to Rs. 55,100. By simply choosing a floating rate Home Loan such as an HSBC Home Loan, you would end up saving to the tune of. 2,240 every month. While this might look meager, to begin with, if you take the bigger picture into account and calculate the sum over the entire tenure of 10 years, you would end up saving a massive Rs. 2,68,800.
Moreover, given that floating rates are subject to regular revisions and are cyclical over the long run, you might end up saving a considerable amount when the rate inevitably drops as well. Additionally, owing to the lower rates of interest, other related charges will also likely be lowered along with it.
If you have plans of making prepayments and closing the Home Loan before the tenure ends, then a Floating Rate Home Loan makes more sense. This is because there are no prepayment penalties in case of a floating rate loan. Say, for instance, if you plan to take a Home Loan only up to 5 years, then it’s advisable to go for a floating loan. Moreover, the likelihood of the floating interest rate changing dramatically over a shorter period is also lower which makes it a better proposition than a fixed interest loan.
Another advantage of picking a floating rate of interest is that you stand to benefit from market rate fluctuations. It definitely makes more sense to opt for a floating interest rate Home Loan. For instance, if the market rate goes below the benchmark or base rate, you will enjoy lower rates of interest than even fixed interest rates. This is one of the many reasons why floating rate loans have become popular owing to the flexibility and financial freedom they offer to the customers. Simply put, if you’re uncertain about where the interest rates are moving towards, it makes sense to opt for a floating rate Home Loan as your risk is minimal thus helping you score monetary gains from potential market movements in the future.
Needless to say, owing to the lower rates of interest applicable to floating loans, you will end up paying lower EMI amounts. This will help you save a significant amount of money monthly allowing you to possibly repay your Home Loan quicker than loans with fixed interest rate due to overall lower interest pay-out.
Both fixed as well as floating rates of interest have their own sets of pros and cons and it’s up to you to decide which Home Loan suits your circumstances best. Besides, before taking any loan, it makes sense to do thorough research at the financial institution from which will you will be applying for a Home Loan to choose the rates and terms that are just right for you. Considering the falling interest rate scenario, our advice would be to opt for a floating rate of interest at this juncture.
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