Interest rate is an important determinant of your home loan affordability. While a low interest rate can help you take a higher loan amount by reducing the EMI payment, a high interest rate can make the home loan expensive and alter your monthly budget significantly. Which is why, before availing a loan, it is important that you have a basic knowledge about interest rates to make an informed decision.
Firstly, it is important to note that there are two types of home loan interest rates– floating and fixed. Knowing about them is essential as the selection among the two can alter your loan EMI However, it can be confusing to choose one between the two.
Here is a quick guide to help you understand both the types of interest rates.
Floating rate of interest
As the name suggests, in floating rate, the interest rate keeps changing and is not constant during the loan tenure. It could be due to economic policies, market trends or lender’s benchmark rate. Currently, the reference benchmark for floating rate is the repo rate set by the Reserve Bank of India. So, if there is any increase or decrease in the repo rate, you might see a change in the interest rate of your home loan too.
When there is a change in the reference rate, the lender might offer you to change your tenure to avoid disruption in your EMI payout and budget. The interest rate could be reset in specific periods, about which the lender would inform you.
Why should you opt for a floating rate of interest?
- Floating rate loans are subject to changes. This means your interest rate can fall, helping you save money. Therefore, you can opt for a floating rate if you expect the market rates to fall due to government policies or economic reforms.
- There is no prepayment penalty on floating interest rates.
A fixed-rate of interest
If you opt for a fixed rate of interest, your interest rate remains unchanged throughout the tenure of the loan. It is not affected by any external factors and remains the same irrespective of any fluctuations in the market.
Why should you opt for a fixed rate of interest?
- You need not worry about any market changes affecting your interest amount
- If you want a fixed EMI payout irrespective of any fluctuations in the market, you can opt for a fixed rate of interest.
- With a fixed rate of interest, you can plan your finances better as you know there would be no change in the EMI amount throughout the tenure.
- You can lock the interest amount for your entire tenure.
Before you choose a fixed or a floating rate of interest, it is important to consider your eligibility and repayment capacity. If you are optimistic about the fall in interest rates, you can opt for floating rate loan as it could lower your interest payout and benefit you in the long run. However, if you do not want any alteration in your monthly budget or find a low interest rate while taking a loan, you can avail a fixed rate loan to lock the rates for the entire tenure.