Which type of home loan should you go for?
Buyers should choose from fixed, floating or a mix of both as per their needs
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