Life was simple when you could easily plan for the future, as your cash flows each month for the loan repayments were very predictable. Whether to choose a fixed rate home loan, which is easy to budget and has an element of certainty with it or to choose a floating rate of interest that provides the benefits of decreased interest rate, is a classic dilemma that has perplexed home loan seekers for ages.
Fixed interest rate home loans allow the repayment in fixed equal monthly installments over the entire period of the loan. The home loan interest rates in such a case are fixed and don’t change with market fluctuations. A fixed rate home loan is excellent for those who are good at budgeting and want a fixed monthly repayment schedule, which is easy to budget and doesn't fluctuate.
Floating interest rate home loans are tied up to a base rate plus a floating element thereof. So, if the base rate varies the floating interest rate also varies. If the floating rate goes over the fixed rate, it will be for some period of the loan not for the entire tenure. The interest rates will surely fall over a long period and thus floating interest rate brings a lot of savings.
When the interest rate on a floating rate loan rises, you have two options.
- One is to let your (EMI) Equated Monthly Installment (amount you pay every month towards the repayment of the home loan) stay constant and your tenure increase.
- The other is to ask for the tenure to stay constant while the EMI increases.
If you cannot manage either (a higher EMI or a longer tenure), then it is best you opt for a fixed rate loan where your tenure and EMI stays unchanged.
For the customer’s convenience, floating rate loans were recently introduced. The interest rate on these loans changed every time the interest rate in the financial system changed. The monthly installment falls if interest rate in the economy falls. With other companies the monthly installment amount was kept fixed but the tenure of the loan reduces if interest rates in the economy fall. Usually, floating interest rates are quoted in the form of "PLR plus premium". The PLR (Prime Lending Rate) varies from company to company and changes as frequently as once in 3 months.
In order to reduce this disadvantage of the floating rate loan some progressive banks have introduced a hybrid loan. In this case a person can decide to fix the interest rate on his loan for periods of 1,2 or 3 years on a long tenure loan and subsequently decide to float his loan.
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