3 MinsNov 18, 2020
Pritish Singh, 38, is planning on buying a home in Nagpur. He has submitted all his documents and has qualified for a loan of Rs. 50 lakh from his bank, based on his income and other conditions. Now Pritish has to make one final decision before
he avails of the loan. What kind of interest payment should he choose: A fixed rate of interest or a floating rate?
Given the long tenure of a home loan, the interest rate is one of the most important factors to consider. Let’s take a look at both types of loans and understand which one meets Pritish’s needs:
Fixed Interest Rate Loan
In a fixed rate home loan, the rate of interest is decided before you take the loan. If Pritish chooses this option, then he will have fixed EMIs (Equated Monthly Instalments) for the entire tenure of the loan. The interest rate won't change irrespective
of changes in market interest rates (Repo Rate). Hence, Pritish can calculate the money he is liable to pay as EMI in advance and plan his finances accordingly.
Floating Interest Rate
In a floating rate loan, the rate of interest changes with change in Repo Rate. If the Repo Rate, which is based on policy rates announced by the Reserve Bank of India, moves up, then Pritish’s home loan rate will go up. Similarly, if Repo Rate
comes down, Pritish’s home loan rate will come down.
The floating rates change at specific periods, could be once in three months , depending on the condition laid down by the bank. This is known as reset and the bank will inform the borrower of the frequency of the reset in the loan application.
Whenever the rate changes, either the loan tenure or the EMI also changes.
[Also Read: Home Loan Balance Transfer - All You Need To Know]
Differences between Fixed and Floating Interest rate loans
• The biggest difference is that the interest on a fixed rate loan is higher than a floating rate loan. Pritish should be aware of this when opting for the loan.
• Another big difference is that in case of a floating rate loan there are chances that the interest rate could increase or decrease. Hence, if Pritish opts for a fixed rate when applying for the loan, but the interest rates decrease in the future,
then he will not be able to get the benefit of the lower rates.
• If Pritish has the view that interest rates are low at the time of the loan application, then he may choose to opt for a fixed interest rate loan so that he can enjoy the low rate for the entire loan tenure. But if his view is that the
interest rate cycle may see many ups and downs during the entire loan tenure, then he may opt for a floating rate loan to take benefit of the changing rate cycle.
• Another difference is that floating rate loans have no prepayment penalty. This means that if Pritish suddenly has a windfall, say a festival bonus or an inheritance; he can pre-pay his home loan (either in part or full) without any penalty. But in case of a fixed rate loan, he will be charged a pre-payment penalty if he chooses to pay off his loan before maturity.
Axis Bank offers home loans at extremely competitive interest rates. Its range of home loan products is designed to meet the needs of its varied customer base.
Visit our website to find out more about Axis Bank Home Loans.
Disclaimer: The Source, a Mumbai-based content creation, and curation firm have authored this article. Axis Bank does not influence the views of the author in any way. Axis Bank and The Source shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.