Owning at least one house is a dream of every Indian citizen. And to own a house, Home loan from a bank is the easiest way.
When there is a loan, there is a cost attached to it and the cost is ‘Interest’ to pay. There are two types of interest that bank charges.
1. Fixed Rate of Interest
2. Floating Rate of Interest
- Fixed Rate of Interest:
As the name indicates, in this type, the rate of interest charged to the borrower remains constant throughout the entire tenure of loan. At times, the fix rate of interest can be for a certain tie frame i.e. for example 5-10 years. It depends on the bank policy and the loan product. It is borrower’s choice to opt for a fixed or floating home loan interest rate. Borrower can predict the exact EMI and it does not change till the full repayment of loan.
Benefits of Fixed Interest Rate:
As the interest rates does not change under any circumstances, borrower is protected against the change in the interest rates by RBI or Bank. If the rates increase, the he is not liable to pay the higher cost.
As the interest rate and EMI is fixed, it makes easier for borrower to accurately plan the monthly budget.
Cons of Fixed Interest Rate:
However, please note that Banks usually charge higher Interest rate for taking home loans on fixed rates. As of December 2022, the interest for floating rate home loans are available from around 8.50% p.a. and fixed-rate home loans are available in between 10.00% p.a. or even higher. It varies from bank to bank and borrower to borrower. While charging interest rates banks considers various factors such as credit score, income, security etc. as well.
Further, if the interest rate falls, the borrower with fix interest rate will not be benefited as the revised interest rate doesn’t affect the loans already borrowed, using the previous interest rate.
- Floating Rate of Interest:
Unlike of Fixed interest, under the Floating interest rate policy, the rate of interest of loan gets revised from time to time by the bank. It depends on the change in banks’ policies or financial policies of the Reserve Bank of India (RBI). RBI has recently increased the Repo Rate by 35 basis points on 7th December 2022. Now, the revised Repo Rate is 6.25% with immediate effect.
When RBI increases the Repo Rate, Banks increases their PLR (Prime Lending Rate). In simple words, Banks increases their interest rates on loans & deposits which lead to increase in interest rates for home loans, car loans, and personal loans etc. This change in Repo/PLR impacts on loans that are floating.
For example, assume that the current interest rate of your home loan is 9.00% p.a. (the Repo rate is 5.90%). After 07.12.2022 when RBI increased the Repo Rate by 35 basis points; your rate of interest would be 9.35% p.a. It may be lower or higher as per the bank policy.
Borrower cannot predict the exact EMI in floating rate of interest. It can revise frequently.
Benefits of Floating Interest Rate:
As mentioned in above points, Floating interest rates are usually lower than the fixed interest rate offered by the bank. Borrower will get the benefit if the interest rate falls.
Cons of Floating Interest Rate:
Due to the EMI fluctuations, it is not possible to have a fixed repayment schedule and it becomes difficult to budget a loan with floating rate of interests.
Few parameters to consider while choosing Fix or Floating interest rates.
1. Prepayment charges: Most Banks charge a fee, if a borrower pre-pay the amount towards a Fixed Interest Rate Home Loan. These charges are usually around 2% of the amount paid. It depends on bank policy.
Where there are no pre-payment charges applicable on Floating Interest Rate Home Loans.
2.Conversion charges: Banks usually charge a conversion charges i.e. around of 2-3% of the outstanding loan if borrower wishes to convert the loan from a fixed interest home loan into a floating-interest one. It depends on bank policy.
However, there are usually no charges applicable for converting a floating interest rate loan into a fixed-rate loan.
Depends on the banks policy, few banks may have relaxed eligibility norms for home loans with fixed rate of interest. However, please note that many times, borrowers with low CIBIL scores are eligible for only to fixed interest home loans.
What to choose?
You can choose Fixed Interest rate in below scenarios,
- A borrower prefers a fixed repayment schedule and if it is easy for him to pay the current interest and EMI amount. Please note that your EMI amount should not be more than 30% of your net monthly income.
- You can choose fix interest rate if there is rising interest rate scenario just like 2022 and you foresee a rise in the interest rate in the future. The year 2022 is the example rising interest rates.
|Revised On||Repo Rate|
|7 December 2022||6.25%|
|30 September 2022||5.90%|
|8 August 2022||5.40%|
|8 June 2022||4.90%|
|4 May 2022||4.40%|
- When you believe that there has been a decline in the interest rates recently and it is likely to remain as it is for a few more years.
You can choose Floating Interest rate in below scenarios,
- It there is an indication that interest rates are going to reduce in the near future, you can prefer floating interest rate.
- Many borrowers choose floating interest rates as it is suitable for them who ho does not have enough knowledge regarding the market cycles and thus, want to go to the current market rates.
Follow us on Facebook