Deciding to take a Home Loan is no small decision. Home Loans are long-term loans, often running into years. Thus, borrowers must try their best to make their EMIs as affordable as possible. One of the best ways to do this is to negotiate for a low interest rate.
However, negotiating for a good interest rate isn't enough; you must also select the right type of interest rate. In India, Home Loans are offered on fixed and floating rates of interest. This article looks at the merits of availing of a floating interest rate for Home Loan.
What is the Floating Interest Rate on a Home Loan?
The floating interest rate is the rate that changes with changing market conditions. It is linked with the base rate chosen by the lender. In India, floating interest rates are usually linked with the Repo Rate, which is the interest rate at which the Reserve Bank of India lends money to commercial banks in the country.
How does a Floating Rate of Interest Housing Loan Work?
When RBI increases the repo rate, the floating interest rate also increases, resulting in expensive Home Loans and EMIs getting higher. On the other hand, when the RBI decreases the repo rate, the floating rate goes down. This, in turn, leads to lower and more affordable EMIs.
In India, most Home Loan borrowers opt for floating interest rates as they come comparatively cheaper compared to a fixed interest rate loan. Usually, the interest rate of a floating-rate loan is 1% to 2% lower than fixed-rate loans. Even if the base rate increases, borrowers shouldn't worry much as these fluctuations are temporary. The interest rate goes up sometimes while at other times, it falls; hence, the average remains more or less the same.
Benefits of Opting for a Loan on Floating Interest Rates
Floating interest rates offer several advantages over fixed interest rates. Here we list some of these main advantages.
Floating Interest Rates Are Cheaper
The biggest reason why Home Loan borrowers prefer floating interest rates over fixed rates is that floating interest rates are 1% to 2% cheaper than fixed interest rates. Since Home Loans are long-term loans, a 1% to 2% difference in the interest rate can lead to a person saving a substantial amount of money, often running into lakhs.
Floating Interest Rates Help One Build Savings
Most borrowers in India avail of floating interest rates when they anticipate that the base rate will go down. When this happens, they save big on their EMI payments, leading to a decent amount of net accumulated savings.
Zero Prepayment Charges
Individuals who have availed of a Home Loan on floating interest rates can prepay or foreclose their loan at no additional cost at any point during the life of the loan. On the other hand, those who have availed of a Home Loan on fixed interest rates must pay a prepayment penalty. This is a huge advantage for individuals who do not wish to stay in debt for years and plan to repay their Home Loan before the end of the agreed tenor.
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