Should i fix a home loan rate?
We will give you answer of this question later.
Firstly we will tell you about what is fixed rate and floating rate.
Fixed interest rate–
Fixed interest rate is repayment of home loans in fixed equal installments over the whole period of the loan. In this case, the interest rate doesn’t change with the market oscillations. Earlier, the majority of monthly payments are used to service the interest and the principal is served in the later.
Floating interest rate–
Floating rate is where the rate of interest fluctuates with market conditions. These loans are knotted to a base rate and have a floating element. If the base rate is reviewed upward or downward depending on the market conditions, the floating interest rate is also reviewed accordingly. Click here to read about SBI home loan service in India.
In fixed rate, we can pay our home loan off without worrying about sudden hikes given to us, threatening us, by our respective banks/banking institutions. But these loans are usually 1-2.5% points higher than the floating rate loan.
When we should choose fixed rate loan?
A fixed-rate home loan is excellent for those who are good at budgeting and want a fixed monthly repayment plan, which is easy to budget and doesn’t fluctuate. If your current EMI is less than 35-40% of your monthly income, you will likely find repaying your loan not a bother. You can fix your rate at this level to avoid future possible hikes, which may disturb your finances.
If you want certainty in the initial period of the loan and you cannot afford any further rate hikes for the next few years at any cost, then you can switch a part-fixed-part-floating-rate loan which is offering a fixed rate for the first 3-5 years and a floating rate thereafter is for you.
If you notice that market conditions are such that rates are only going to increase however unlikely that may be currently then you should choose a fixed rate.
If you are not looking to prepay the home loan and deal it for a long tenure, it is always good to choose a fixed rate when the rates come down. This may help you to reduce the interest outflow for the long term if you are getting a good rate under a fixed loan. Click here to read about Right time to switch your home loan.
When we should not choose fixed rate loan?
If you decide to make part pre-payments every year or close the loan within 5-7 years, you can continue with a floating rate. This is because the earlier you close the loan the minor is the interest outflow. Therefore, rate fluctuations have a minor impact on your loan on a whole.
If you can manage your EMIs in spite of the instable rates, you need not opt for a fixed rate. This applies when your EMI is less than 35% of your salary. Since fixed rates are often higher than prevalent floating rates, you may find it difficult to manage a fixed rate loan in such cases.
If the floating rate goes over the fixed rate, it will be for some period of the loan and not the entire tenure. The interest rates will surely fall over a long period and, thus, the floating interest rate brings a lot of savings.
When it comes to choosing the interest rate, a majority of home loan borrowers go for floating rates.
Finally, it is up to the borrower to decide what suits him best. Before taking a decision, it is sensible for the borrower to compare home loans from different institutions in detail, including the various parameters. If certainty and security are prime considerations, a fixed rate home loan will be the best. However, it won’t come without the premium on interest rates.
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