Availing of a Home Loan is a significant financial commitment, often spanning several years. To ensure manageable EMIs, borrowers should focus on securing a low interest rate. In India, while Home Loans at fixed interest rates are available, they are mostly offered at floating interest rates. This article explores the advantages of opting for a floating interest rate and how it can impact your loan repayment.
The floating interest rate varies based on market conditions and is linked to the base rate chosen by the lender. In India, floating interest rates are usually linked with the Repo Rate. As the Repo Rate fluctuates, so does the floating interest rate, impacting loan repayments accordingly. The table given below shows the current Home Loan interest rates for salaried and self-employed applicants:
| Applicant type | Interest Rate |
|---|---|
| Salaried applicant | 7.45%* to 10.25%* |
| Self-employed applicant | 7.85%* to 10.65%* |
How Does the Floating Rate of Interest 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 feasible 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 Choosing a Floating Interest Rate Home Loan
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 funds.
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. For Dual Interest Rate Home Loans (fixed for an initial period and then transitioning to floating), foreclosure or part-prepayment charges will be determined based on the loan's interest rate type at the time of foreclosure or prepayment date.
*Terms and conditions apply.
How to Manage Fluctuations in Floating Interest Rate Loans
Floating interest rate Home Loans offer potential savings. When the lending rates go down, your EMIs or overall interest outgo can reduce too. Your EMIs or total interest expenses may also decrease when lending rates decline. The converse is also true: any increase in interest rates has the potential to raise the obligation. Understanding the risks and taking appropriate precautions will help floating rate loans work in your favour:
- Budget for possible fluctuations
Always account for the potential for increasing EMIs when choosing a loan with a variable interest rate. To ensure that any increase in repayment does not interfere with your essential expenses, leave a margin in your monthly budget. You can stay comfortable even if interest rates rise if you have a financial cushion. - Explore hybrid loan options
You can opt for a Dual Interest Rate Home Loan. It provides borrowers with stability and predictability during the first three years of the repayment period by offering a fixed interest rate. The loan changes to a floating interest rate after the first three years, allowing you to take advantage of a lower rate. A Dual Interest rate Home Loan helps you gradually adjust to the variability of floating rates by providing you with stability in the early years and flexibility in the later years. - Keep track of market trends
Keeping up with market conditions can help you make better plans because economic conditions have an impact on floating rates. You might look into options for balance transfers or refinances if rates seem to be on a long-term upward trend.
Floating interest rates on Home Loans are variable rates that change during the loan tenure, depending on market conditions and benchmarks like the Repo Rate.
A floating interest rate directly impacts your monthly repayment. If the Repo Rate increases, the floating interest rate goes up. This can lead to higher EMIs or loan repayment costs.
Conversely, when the Repo Rate decreases, the floating interest rate also goes down, resulting in lower EMIs. Because floating rates are linked to market conditions/base rates, the EMI can vary over time rather than remaining fixed.
