Fixed rate of interest: Should you consider it?
Most home loan borrowers prefer to take home loans at a floating rate of interest. With the right handling, a fixed rate of interest can actually be beneficial for you.
Till a few years ago, the real estate market in India was marked by high prices that made it difficult for many buyers to invest in property. But today, there are curious trends in residential property purchase. Not only have house prices scaled absurd heights, most people are unable to cobble together even the down payment on the house. You might inadvertently take an expensive loan that stretches your monthly budget.
A choice must also be made between fixed and floating rate of interest. Most home loan borrowers prefer to take floating rate of interest because they can get lower EMIs when rates fall. In contrast, fixed rate home loans keep the EMI unchanged over the entire tenure of the loan. So, for example, if you take a fixed rate home loan at 8% per annum, then you will be charged 8% loan for the entire duration of the loan.
You might angle for a lower EMI and opt for a floating rate of interest. But there are good benefits of taking fixed rate home loans, such as –
* Stability over the entire loan cycle. If you are a new home loan borrower, you are probably not used to the rigours of repaying home loan EMIs. To the inexperienced buyer, the monthly EMI payment can be a source of stress. Once the EMI is debited from the account, you are left with the remainder of your income to grapple with personal and household expenses. In this scenario, it helps to have an unchangeable EMI amount, so that you can budget your expenses despite restricted finances.
* You can choose a lender that offers fixed rate for a few years. Though most home loan companies offer fixed rate home loans for the entire tenure of the loan, others offer more unique products. For instance, Punjab National Bank Housing Finance Limited (PNBHFL) offers home loans where you can get fixed rate of interest for 2, 3, 5 and 10 years. Post this time period, you are switched to a floating rate of interest. Thus, this feature combines the stability of fixed rate loans with the money-saving capabilities of floating interest.
* You can switch to a floating rate of interest if the fixed rate doesn’t suit you. After a few years of repaying your loan via fixed rate of interest, you may feel that your EMI is too high. At this point, you can ask your home loan company to switch you to a floating rate of interest. You might have to pay processing charges for making the switch. From the next EMI after the transfer, the EMI amount will be calculated basis the floating rate of interest on the remainder of the unpaid loan amount.
However, do keep in mind a few facts about fixed rate home loans. For one thing, the initial years of the loan only take repayments on interest. This is a significant factor if you take a fixed rate of interest for an under-construction property. You must pay pre-EMIs (these are only interest payments) till you get the house possession, at which point the actual EMI cycle begins. So you end up repaying a lot of money.