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29 OCTOBER, 2021
One of the crucial factors that can have a huge bearing on your overall home loan amount is the interest rate. This is why you must be careful while choosing between floating and fixed interest rates. While it might look like fixed interest rates are better as they remain constant, the truth is far from different. Experts believe that floating interest rates are usually better. If you are looking forward to availing a home loan, here is a guide to explain why floating interest rate home loans are better.
What Is Fixed Interest Home Loans?
As the name suggests, fixed interest rates remain constant throughout the tenure. It is not affected by market fluctuations or economic policies and remains unchanged for the entire home loan tenure. So, if you opt for a fixed interest rate, you will have to pay the same EMI for your home loan.
What are Floating Interest Home Loans?
Floating interest rates are highly affected by market forces and can change during tenure. Usually, these rates are pegged to an external benchmark rate like Reserve bank of India's (RBI)'s repo rate. With floating home loan interest rates, your EMIs are unstable, and you could face difficulty in setting your monthly budget. However, despite the fluctuations, floating rates are better than fixed interest rates. Here’s why.
Why are Floating Interest Rates Better?
Floating rates are usually slightly lower than fixed interest rates. Lenders charge more for fixed interest rates to cover their interest risk for the entire tenure. While it depends on the lender, the difference can be between 250-400 bps. Therefore, while you might think that the fixed interest rate would be cheaper due to its fixed nature, the total interest outgo can be much higher in the longer run.
As per Reserve Bank of India's mandate, lenders cannot charge a prepayment fee on floating interest rate home loans. Therefore, if you plan to prepay your home loan, you would not need to pay any foreclosure charges. Usually, the prepayment charges are 2% of the outstanding loan amount. However, this concession is not applicable on fixed interest rate home loans.
Lately, very few lenders offer fixed interest rate home loans. Therefore, you have limited choices in fixed interest rate home loans. While a few lenders offer hybrid loans where fixed interest rates change in floating after a few years, it is not usually recommended.
Floating interest rates have more transparency and flexibility. They are cost-effective and provide you flexibility in benefiting from competitive pricing structures. It also helps you easily opt for a home loan balance transfer.
Though floating interest rates are uncertain and keep changing throughout the tenure, they are usually cheaper and cost-effective. Therefore, you must research both home loan interest types before you apply for home loan. If you are confused, it would be best to consult a financial advisor and then decide.
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