The interest rate charged on your home loan decides the overall affordability of your loan. So, while comparing lenders before applying for a home loan this is one of the key factors to pay attention to. However, getting a low rate sanction is not enough. You should also understand whether a fixed interest rate home loan suits your finances or is it the floating interest rate that you will find more feasible to repay.
What is Fixed and Floating Interest Rate?
Lenders offer you a home loan sanction on either fixed interest rate or floating interest rate. So, if you avail a home loan on a fixed home loan interest rate then it means that all along the tenor of your loan, the interest component on your loan will remain constant. Keep in mind however, that fixed rate loans have a reset clause. This allows your lender to change your fixed rate to floating or hike the interest based on certain criteria.
On the other hand, if you take the loan on floating home loan interest rate, then the interest parameter on your loan will fluctuate as per the market dynamics. This means that when you repay a fixed interest rate home loan, your EMIs stay constant all along the tenor. While, for a floating interest rate home loan, the EMIs can either increase or decrease basis the interest alterations or your tenor can be increased or decreased if the EMIs are kept to the same amount.
Now that you know about these two variants of home loan interest rate, take a look at the positives and negatives for each a little in detail.
Pros and Cons of Fixed Interest Rate
- The good thing about fixed interest rate loan is that you can be sure of the interest obligation on your home loan for the entire tenor. So, you can plan all your other expenses and investments for the long-term confidently without having to worry about the increasing EMIs or a changing tenor. This helps you stay on budget and helps you can maintain your debt-to-income ratio with ease.
- The disadvantage of fixed interest rate home loan is that you will not have a chance to alter the interest rate on your home loan if the market rates fall below the existing interest you are paying on your home loan. Moreover, lenders tend to charge 1% to 2.5% higher interest rate on fixed rate loans as compared to floating interest loans.
Pros and Cons of Floating Interest Rate
- The biggest positive about a floating rate home loan is that your home loan interest rate will depend on the market. This means that your EMIs will decrease as soon as the economic conditions improve. Banks offers loan via the MCLR or Marginal Cost of Lending Rate system so vide the RBI quarterly base rate directive they alter the interest rate on your home loan if you are on the floating interest rate system. On the other hand, the disadvantage here is that in case the base rate increases then the interest rate on your home loan will immediately increase because you are part of the floating interest rate system.
- You can enjoy the biggest benefit of floating interest rate home loans by choosing to take the loan from NBFCs. Since they offer loan sanctions on PLR rates, even when the market fluctuates you can negotiate a good interest rate on your home loan and keep your EMIs within your budget all through the tenor.
You can check your EMIs in advance using the home loan EMI calculator. Toggle parameters such as the loan amount, tenor, and interest rate to compute an EMI that suits your income and expenditure. Based on this you can negotiate rates with the lender.
Many lenders apply a mixed interest rate on your home loan. This means that for the initial few years they charge you a fixed interest on your loan, which automatically alters after the initial phase is over. Then loan becomes a floating interest rate home loan. In this regard, the interest rate can either increase or decrease basis the on-going market conditions. Since the market and economic conditions are unpredictable and because your home loan repayment usually spans 10 to 20 years, experts recommend choosing a fixed interest rate home loan. The key here is to select a home loan that has a competitive interest rate.
Now that you are aware of the two interest rate variants, you can use the home loan eligibility calculator to check your loan eligibility for Home Loan with lenders such as Bajaj Finserv. Here you can get a sanction of up to Rs.3.5 crore on easy terms and a low interest rate for a tenor of up to 25 years. Additionally, you can enjoy the benefits of Flexi Loan facility, 3-EMI holiday, and top-up loan on your sanction.
