Which type of home loan should you go for?

Buy­ers should choose from fixed, float­ing or a mix of both as per their needs

HT Estates - - HTESTATES - Anup Saha

Buy­ing a house is one of the ma­jor de­ci­sions taken by a fam­ily. An im­por­tant com­po­nent of re­al­is­ing your dream home is avail­ing a home loan. While avail­ing a home loan, the bor­row­ers should fa­mil­iarise them­selves with key con­cepts/pa­ram­e­ters as­so­ci­ated with home loans ie, loan amount (prin­ci­pal), re­pay­ment ten­ure, rate of in­ter­est, equated monthly in­stall­ment (EMI) and pre-pay­ment charges (if any).

Th­ese pa­ram­e­ters are doc­u­mented by the lender dur­ing the loan ap­proval process and com­mu­ni­cated to the bor­rower through the sanc­tion let­ter.

One of the key com­po­nents that the bor­rower eval­u­ates prior to avail­ing a home loan is the rate of in­ter­est charged by the lender. There are dif­fer­ent types of in­ter­est rates of­fered by the len­ders to suit the re­quire­ments of the bor­rower.

The dif­fer­ent types of rate of in­ter­est of­fered cur­rently are Fixed rate – fixed rate, float­ing rate and part fixed – part float­ing rate of in­ter­est. The fixed rate does not change dur­ing the ten­ure of the loan. Float­ing rate of in­ter­est is de­fined as a base rate plus an el­e­ment of mar­gin to ar­rive at the fi­nal rate of in­ter­est be­ing of­fered to the bor­rower.

Some len­ders also of­fer a new type of home loan, which is a com­bi­na­tion of fixed and float­ing in­ter­est rate. In this, for the first few years, in­ter­est is at a fixed rate, which is not sub­stan­tially higher than the float­ing rate.

At the end of the pre-de­fined pe­riod, the bor­rower is given a choice of re­new­ing the fixed in­ter­est rate or con­vert­ing to the ap­pli­ca­ble float­ing in­ter­est rate.

The bor­row­ers are free to Fixed for the en­tire ten­ure of the loan. Change in the in­ter­est rate cy­cle does not im­pact the EMI

choose the type of rate of in­ter­est for their home loan de­pend­ing on their as­sess­ment.

Some len­ders pro­vide the fa­cil­ity to con­vert home loans be­tween fixed and float­ing rate of in­ter­est by charg­ing a con­ver­sion fee. The bor­row­ers can avail the same, if they con­sider it ben­e­fi­cial to them in the long run.

The ques­tion that arises is how does one de­ter mine which rate of in­ter­est is suit­able for one’s re­quire­ments. Bor­row­ers should com­pare var­i­ous op­tions avail­able with len­ders be­fore de­cid­ing on the home loan which suits their re­quire­ments. Float­ing rate of in­ter­est can be con­sid­ered by bor­row­ers who want to avail a home loan for a longer ten­ure and are com­fort­able with Gen­er­ally costlier than float­ing rate of in­ter­est

Ben­e­fits of down cy­cle in in­ter­est rate can­not be availed Pre­pay­ment charges may be ap­pli­ca­ble

In case of in­crease in rate of in­ter­est, the ten­ure of the loan goes up and in some cases the EMI may also in­crease changes in in­ter­est rates over a pe­riod of time. Those bor­row­ers who want to en­joy the comfort of a fixed EMI through­out the ten­ure of the loan and are will­ing to pay a slightly higher in­ter­est rate can opt for fixed rate of in­ter­est.

Sim­i­larly, part fixed – part float­ing rate is suit­able for bor­row­ers who pre­fer longer du­ra­tion loans when the in­ter­est rate is at the bot­tom.

It of­fers a con­ve­nient op­tion to bor­row­ers who want to pos­si­bly ben­e­fit from long- term in­ter­est sav­ings of float­ing in­ter­est rate in ad­di­tion to the ad­van­tages of a com­pet­i­tive fixed rate of in­ter­est in the first few years.

The au­thor is gen­eral man­ager – se­cured as­sets, ICICI Bank

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