Home loan available from banks are having two options either you can opt for fixed interest rate option or variable (floating) interest rate option. In Fix Interest rate option rate of interest remains same over the period of home loan. In floating rate option rate of interest varies (decided by bank based on declaration by RBI about Reverse Repo Rate) this rate varies every quarter.
If you are planning for taking home loan for purchasing home “BIG” question must be arising in your mind that either to choose fix or floating rate option. In this article we will provide you guidance about is it good to opt for fix or floating rate home loan option.
Fixed interest rate home loans
As name indicates in this type of loans rate of interest remains same over the loan period, every month one has to pay EMI on fix interest rate decided during disbursement of loan. As you may be aware that during early year of loan tenure the majority of monthly payments EMI goes in to interest components and small amount goes to principal components.
Advantage of fixed rate home loans
If anyone opt for fixed rate home loans option than he has advantage over floating rate in a manner that if market pressure interest rate for upward movement than also this rate will be unchanged & borrower has to pay fix EMI. This option is best suited for person who wants to keep himself secure from varying interest rate and want to keep fix amount/fix tenure for payment of loan.
Disadvantage of fixed rate home loans
Main disadvantage of fixed rate home loans are its rate is usually 1.5% -2 % more than floating rate home loan options. Second thing by any chance interest rate in market falls than also fix rate home loan does not get benefit of this reduced rate and rate remains same. Fix rate home loan option are best suited if economic scenario depicts that rate will rise.
Another option available is fix rate option for some year which will be converted in to floating rate option.
Floating rate home loan
In this loan option interest rates are tied with base rates (Prime Lending Rate) and floating elements (usually link with RBI Reverse repo rate) ,if that base rate varies home loan interest rate varies.
Advantage of floating interest rate home loan
Floating rate home loans are available cheaper by 1.5% -2% compare with fixed rate option, meaning if you are getting home loan by bank with 11 % than fixed loan may be offered with 13%. In this case if floating rate increase by 1.5% or so than also your loan will be at 12.5%, Floating rate does not always rise over a period of time it will fall also which brings advantage for floating rate customer as EMI’s will average out.
Disadvantage of floating interest rate home loan
Disadvantage in case of floating rate option is monthly investment EMI / Tenure although is fixed at starting of loan will varies over a period of time as rate may increase/ decrease. If rate increased you have two options keep paying same EMI and increase tenure or loan or increase EMI so that tenure will remain same. In both cases you will be paying more money. Another disadvantage is that you cannot predict that exactly how much amount you need to pay for home loan.
Home loan customer mostly select floating rate home loan to take advantage of floating rates, data shows that 80% of people opt for home loan with floating rates. It is up to borrower to decide option for rate of interest but keeping in mind current situation fixed rate home loan will provide more advantage of security but one has to see that he is not paying more premiums on interest rates.
Raviraj is the man behind moneyexcel.com. He is graduate in finance, engaged in blogging for 8 years. Moneyexcel blog is ranked as one of the Top 10 Personal Finance Blog in India. He is not affiliated with any financial product, service provider, agent or broker. The purpose of this blog is to spread financial awareness and help people in achieving excellence for money. Please note that the views expressed on this Blog/Comments are clarifications meant for reference and guidance of the readers to explore further on the topics. These should not be construed as investment advice or legal opinion.