Home loans are a form of long-term, secured finance offered by various financial institutions in India. It is one of the most popular types of credit in India, achieving a growth of 16% in the fiscal year 2018.
Usually, home loan interest rates in India can be categorized into fixed or floating interest rates. Both have unique perks, and borrowers should have a clear idea about the difference between them before they apply for a home loan.
Fixed Interest Rate
If a customer opts for a fixed rate of interest, he or she agrees to pay a pre-determined rate throughout the loan tenor. The most significant advantage of fixed interest rates is that it stays unaffected from market fluctuations throughout the tenor.
Many people prefer a housing loan with a fixed rate of interest because of the stability of the pre-determined rate it offers. Borrowers are unlikely to get affected by the market’s volatility.
Floating Interest Rate
The floating interest rate depends on the Marginal Cost of Fund Based Lending Rate or MCLR offered by several financial institutions. Whenever the rate changes due to market fluctuations, the interest rate gets automatically revised.
Borrowers with better risk appetite can opt for the best home loan with a floating rate of interest. Floating interest rates fluctuate as per revisions made on the MCLR. Such home loan interest rates in India are usually 1% to 2.5% cheaper than loans with fixed interest rates. Presently, it can go down as low as 8.80% in the case of certain financial institutions like Bajaj Finserv.
Both fixed and floating interest rate comes with its unique benefits. The secured nature of fixed interest makes it a safer option for many andhousing loans allows financial planning for short-term and long-term goals. It is also suitable for short or medium term (3 to 10 years) loans.
Although changing rates makes it difficult for a borrower to plan because of changing EMIs, it can help a borrower to save more on total interest paid throughout the tenor of the loan. Financial experts suggest borrowers opt for floating interest rates if the housing loan has a long tenor (20 to 30 years). However, floating rates may increase whenever the MCLR increases due to changes in the repo rate decided by the RBI.
Home loan interest tax benefits are available on both fixed and floating interest rates. Income tax exemption rules are the same in both cases.
Why Go For a Home Loan With a Fixed Interest Rate?
There are several reasons why one might go for a home loan with a fixed interest rate.
- If a borrower is comfortable paying the current interest amount and prefers a fixed rehousing loan payment schedule, then he or she should go for a fixed home loan interest rate in India. However, you must ensure the monthly installment should not exceed 30-40% of your monthly
- income as it may have a negative impact on your CIBIL score.
- A fixed interest rate stays independent of any market fluctuation. It does not increase even when the MCLR increases.
Why Go For A Home Loan With A Floating Interest Rate?
- A borrower can opt for a floating interest rate if they think that the repo rate might decrease in the future. It will reduce the interest rate and make repayments more manageable.
- The floating interest rate usually stays 1% to 2.5% lower than the fixed interest rate if the market does not go through any changes. A borrower who wants to save more can opt for floating rates.
In any case, a prospective borrower should always remember to determine their EMI amount with an online home loan EMI calculator before availing such a credit. It will give them better insight and help them plan their budget accordingly.
Several financial institutions offer best home loan in India with an affordable interest rate, flexible loan tenor, and several other features and benefits.
Selecting a particular type of interest rate depends on the borrower’s financial situation and the ability to take risks. They should thoroughly consider the above-mentioned points before availing a credit.
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