Availing of a Home Loan is a significant financial commitment, often spanning several years. To ensure manageable EMIs, borrowers should focus on securing a low interest rate. In India, while Home Loans at fixed interest rates are available, they are mostly offered at floating interest rates. This article explores the advantages of opting for a floating interest rate and how it can impact your loan repayment.
The floating interest rate varies based on market conditions and is linked to the base rate chosen by the lender. In India, floating interest rates are usually linked with the Repo Rate. As the Repo Rate fluctuates, so does the floating interest rate, impacting loan repayments accordingly. The table given below shows the current Home Loan interest rates for salaried and self-employed applicants:
| Applicant type | Interest Rate |
|---|---|
| Salaried applicant | 8.25%* to 17.00%* |
| Self-employed applicant | 8.55%* to 17.00%* |
How does a Floating Rate of Interest Housing Loan Work?
When RBI increases the Repo Rate, the floating interest rate also increases, resulting in expensive Home Loans and EMIs getting higher. On the other hand, when the RBI decreases the Repo Rate, the floating rate goes down. This, in turn, leads to lower and more feasible EMIs.
In India, most Home Loan borrowers opt for floating interest rates as they come comparatively cheaper compared to a fixed interest rate loan. Usually, the interest rate of a floating-rate loan is 1% to 2% lower than fixed-rate loans. Even if the base rate increases, borrowers shouldn't worry much as these fluctuations are temporary. The interest rate goes up sometimes while at other times, it falls; hence, the average remains more or less the same.
Benefits of Opting for a Loan on Floating Interest Rates
Floating interest rates offer several advantages over fixed interest rates. Here we list some of these main advantages:
Floating Interest Rates are Cheaper
The biggest reason why Home Loan borrowers prefer floating interest rates over fixed rates is that floating interest rates are 1% to 2% cheaper than fixed interest rates. Since Home Loans are long-term loans, a 1% to 2% difference in the interest rate can lead to a person saving a substantial amount of funds.
Floating Interest Rates Help One Build Savings
Most borrowers in India avail of floating interest rates when they anticipate that the base rate will go down. When this happens, they save big on their EMI payments, leading to a decent amount of net accumulated savings.
Zero Prepayment Charges
Individuals who have availed of a Home Loan on floating interest rates can prepay or foreclose their loan at no additional cost at any point during the life of the loan. On the other hand, those who have availed of a Home Loan on fixed interest rates must pay a prepayment penalty. For dual-rate Home Loans (fixed for an initial period and then transitioning to floating), foreclosure or part-prepayment charges will be determined based on the loan's interest rate type at the time of foreclosure or prepayment date.
*Terms and conditions apply.
