What type of home loan is the best one for you?

4 MinsFeb 12, 2021

Sudhir Naik is planning on buying his first home. He wants to take a loan of Rs 35 lakh for a tenure of 20 years to buy his dream house. His credit score is good and documentation is in order. Hence, he is hopeful that the loan will be approved quickly. However, he is confused with what kind of loan he should go for. Since there are different options for home loans, Sudhir wants to understand which one will offer him the highest savings in the long run.

home loan

Taking a home loan and buying a home is one of the most important financial decisions for anyone. For instance, let’s take Sudhir’s example. He will continue to pay EMIs (equated monthly instalments) on his home loan almost until retirement. He has to be sure that his home loan won’t become a financial burden for him later on. . To do that he needs to understand what are the different options available.

1. Fixed interest rate: A fixed interest rate on home loans means that Sudhir has to repay his home loan in fixed EMIs throughout his tenure of 20 years. This interest rate stays the same irrespective of market conditions outside. However, fixed interest rates are higher than floating rates. The benefit of a fixed interest rate loan is that when interest rates rise, your EMI will not rise. Conversely, when interest rates fall, you may miss out on the benefit of a lower EMI.

2. Floating interest rate: A floating interest rate home loan means the interest rate on your loan will change according to the change in overall interest rate scenario. Hence, Sudhir’s EMI amount may also change.

3. Combination home loan: A combination home loan is a loan that is in part fixed interest rate and in part floating rate. The rate is fixed for a short duration and then moves to a floating rate. Some banks or financial institutions may offer this type of product.

[Also Read: A home loan can be yours even without monthly salary slip]

4. Home loan overdraft facility:This is a really interesting type of home loan. Sudhir’s home loan will have an overdraft facility.In some banks the loan is linked to your savings account or current account. While in case of others it is an entirely new account. Sudhir has the option to deposit surplus funds (any amount) into this OD account. The surplus funds will help Sudhir in reducing the overall interest outgo. Another benefit of this home loan is that if Sudhir needs cash for his expenses, he can simply withdraw it from the overdraft account, and the balance will be adjusted accordingly.

While deciding which type of loan to opt for, the important factors that Sudhir must consider are the likely direction in which the interest rates will move and the differential between fixed and floating interest rates. However, since home loan tenures are usually for 15-20 years, it is difficult to predict how interest rates will move during the entire life of the loan.

What Sudhir needs to understand is that the interest rates banks charge are calculated based on external benchmark (e.g Reserve Bank of India Repo Rate), plus a margin to cover the cost of operations. This margin is called the Spread.

Before deciding on which home loan to select, Sudhir must calculate how much will be the total interest rate outgo over the loan period, the EMI he can afford, whether he can increase the EMI amount gradually, what will be his savings if prepays his loan, and so on.

Axis Bank offers a range of home loan products suited to the needs of all its customers. Click here to find out more about Axis Bank Home Loans. You can check your eligibility by clicking here for the Axis Bank Home Loan Eligibility Calculator.

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.