Congratulations on planning to buy your dream home!
Buying a home is a very important step in your life. But like every major decision in your life, Home Loans in India come with a lot of choices. And a major one is choosing between a fixed rate and a variable rate Home Loan.
Well, let’s find out the difference between the two.
* Fixed Rate Home Loan
As the name suggests, in case of a fixed rate Housing Loan the rate of interest is always fixed. You repay the EMIs in fixed instalments over the entire loan term. For example, say the interest rate on your House Loan is 11%. You will repay your outstanding loan at this same (11%) rate of interest. There would be no change in the interest rate regardless of any rate fluctuations in the market.
* Variable Rate Home Loan
In a variable rate, the Home Loan interest rates vary from time to time. The floating rate on your loan is linked to Marginal Cost-based Lending Rate (MCLR). So, whenever the MCLR fluctuates, the interest rate on your House Loan changes.
* Which is Better?
Every buyer eligible for Home Loan wants to figure out which is better. Most banks and financial lending institutions offer both types of loans to customers. Both fixed and floating rate Home Loans have their own advantages and disadvantages.
A big advantage of fixed rate Home Loan is that the interest rate is constant throughout the loan term. You don’t need to worry about market fluctuations. You don’t have to wake up one day and realize that you need to pay a lot more this month on your Home Loan. This helps to bring a sense of stability and structure to your repayment plan.
A big selling point of floating rate loans is that they are generally cheaper than fixed rate loans. This can help you increase your savings over the entire tenure of the loan.
The uneven interest rate is a drawback. It is possible that the interest rate can go even higher than that of a fixed rate Home Loan. This can be a problem if you cannot accommodate the changes in your monthly budget.
But the good thing is that interest rates tend to fall over time. As a result, it is possible for the cost of your loan to be lower even after an increase in interest rates.
* When do you go for a fixed rate Home Loan?
> Opt for a fixed rate if:
- You want to lock the interest rate
- You expect a rise in interest rates in the future
- You prefer a steady EMI structure
* When do you go for a variable rate Home Loan?
> Opt for a variable rate if:
- You expect interest rates to fall in the future
- You prefer savings in the near term
- You prefer to go along with the market rates
To Sum Up
Whether you choose a fixed or a variable rate Housing Loan, do a thorough research before you decide. Compare the different loans and see which option suits you the best.
I am a Financial Advisor with an experience of more than 7 years.I had worked for top Financial Firms in India and has been a visiting faculty at many reputed institutes. I have done my post-graduate in Business Economics, from Princeton University, USA. During my free time, I teaches children from marginalised sections of society and also work on my Blog.