The choice of a fixed, floating, or semi-fixed interest rate home loan, depends on factors such as the tenure of the loan, age of the applicant and prevailing market conditions
When opting for a home loan, buyers have a choice between three types of schemes – fixed, semi-fixed and floating interest rates. Choosing the correct scheme can be a tricky affair. Various factors can affect buyers in short and long term if a wrong home loan scheme is selected.
In a home loan with a fixed rate of interest, the equated monthly installments or EMIs will remain constant over the tenure of the loan. It is useful to opt for this if interest rates have bottomed out. However, fixed rates are usually higher than floating rates at any given point. On the other hand, for floating interest rate loans, the EMIs would fluctuate as per the market dynamics, as interest rates increase or decrease.”
A semi-fixed rate home loan is a combination of fixed and floating rates. The interest rates on such loans remain unchanged for a specified period of time, after which, the rate of interest is converted to floating.
What suits you?
Experts point out that when interest rates were rising, very few banks and financial institutions were willing to offer fixed rate loans. They were charging at around two to three percent higher than the prevailing floating interest rates. However, now that interest rates are on a downturn, banks have cut the margin spread and are trying to woo customers, with fixed and semi-fixed rate loans.
A home loan seeker must analyze all the factors before finalizing a loan and opt for a scheme that best suits his/her needs and not be lured by the bank’s lucrative offers.
Who should go for Floating Vs Fixed Vs Semi-Fixed rate loan
Floating rate is suitable for the persons who take the loan for a longer period which is more than 20 years. The Fixed rate is apt for short/medium term loan seekers while semi-fixed rates are suitable for medium term loan seekers.
When interest rates are struggling to stay afloat or when the rate is to fall it is advisable to go for floating rate. The Fixed rate is suitable when the interest rate is subject to adopt higher trajectory or go up. Semi-fixed rates will ideally be suited to the situation when in short term the rates are expected to rise and fall down in further course.
When the financial tide is in your favor or the income is enough to support rate fluctuation it is proper to go for floating rate. In contrast, if the tide is not in your favor i.e. the income flow is expected to remain stagnant, opt for fixed rate. The option of semi-fixed rate is also viable for such loan seekers too.
If the borrowers are in the age group of 30-35 years then they should go for floating rate of interest. Loan seeker above 50 years of age should opt for fixed rate due to their low ability to take risks. The same logic will apply on loan seekers who dither from taking risks.
Nowadays, banks are providing flexible tenures for repayment of loans, for a maximum period up to 30 years as per their requirement/eligibility. Some websites and newspapers also give a comparative analysis of housing loan schemes of various banks. Loan seekers can visit the websites of various banks, to get details of housing and other loan products and select a suitable bank accordingly.
The type of interest rate you choose has an impact on the monthly EMIs you pay. It is important that one should know the difference between the fixed rate home loan and floating rate home loan.
Market conditions and its bearing on interest rate schemes
Multiple rate cuts by the RBI, indicate that the market is entering a period of low-interest rates and the same is likely to fall further, in the coming years.
After a series of rate cuts, the RBI is now focusing on its transmission and has been urging banks to pass on the rate cuts to customers, through their lending rates. Consequently, banks may reduce their rates, which would benefit borrowers of floating rate home loans.