Young people today, are preferring home loans as a viable financial option. Over the years, many home loan providers have emerged in the market, bestowing the growing clientele with several benefits. This article explores the different types of interest rates charged on home loans. These types are two: fixed interest rates and floating interest rates.
Due to the coronavirus pandemic, the continuous speculations, and new information, the market has been highly volatile for more than a year. Even the slightest of changes in the current scenario can affect and influence the market. This is making the market-related dynamics extremely sensitive.
Hence, as we shall see, fixed interest rates are looking more promising than floating interest rates. The benefits and demerits of both fixed and floating interest rates are discussed in great detail, providing a comprehensive outlook on the two. It also grants a holistic view of the best providers of home loans in India.
With the real estate prices shooting up, home loans show an easier way of securing properties. Yet, home loans are long-term decisions that can change your financial grounds significantly. Thus, it is vital to scrutinize your monetary standing well. It shall aid you in making an informed, rational decision.
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Fixed Interest Rates
As the name suggests, the interest rates remain fixed during the entire tenure of loan repayment. Hence, the rates do not alter ever. They stay independent of the changes experienced in the market. Typically, current fixed interest rates for home loans last for 30 years.
Advantages of Fixed Interest Rates
Home loan at fixed interest rates bears the following advantages:
Cushioned against uncertainty
Since the interest amount charged against the loan does not alter with the market, they provide a safety net. In volatile markets, view fixed interest rates as safeguarding elements.
In the circumstances like today, one should opt for fixed interest rates. They can cushion the impact of the changes in the surroundings.
Forecasting becomes easier
The interest amount charged remains fixed. Hence, uniformity retains, making forecasting one’s EMI amounts easy. You can even perform a home loan fixed interest rate comparison for a more detailed, comprehensive analysis.
Steadiness ensures that the planning process is well-equipped. If you can afford to pay the current amount in EMIs, then current home loan fixed interest rates may work well.
Demerits of Fixed Interest Rates
However, its demerits are as follows:
Even with the stability and the effectiveness of planning, the biggest drawback of fixed interest rates is that they tend to be higher than the floating interest rates. It is a cost that you need to bear for the reduced risk element. Moreover, fixed interest rates scrape away all the possibilities of market benefits in their entirety.
No market benefit
Fixed interest rates protect one from the uncertain movements of the market. But, it also acts as its downside. As the rates remain fixed, reduced fluctuation in the market will be rendered useless for fixed interest rate loan borrowers. Falling interest rates can help reduce the cost of the loans to a great extent. Therefore, getting barred from attaining its benefits is a major drawback.
Floating Interest Rates
These rates keep varying throughout loan repayment. They fluctuate depending on the changes in the base rate made by the RBI. These interest rates revise after regular periods, i.e. a quarter. The norms of the RBI also dictate no application of the prepayment penalty.
Merits of Floating Interest Rates
Floating interest rates come with the following benefits:
Reduced loan cost
One of the greatest merits arising out of floating interest rates resides in the realm of cost reduction. Since they are lower than the fixed interest rates, they reduce the cost of the loan.
They are 1%-2% lower than the fixed interest rates.
Higher prospects of future gains
Because the market determines this rate, there is also heightened risk. With increased risk, there is also the possibility of attaining greater gains.
Availability of prepayment option
Prepayment options are available in floating interest home loans. It means that in the case of excess income, you can pay off your loans faster.
Demerits of Floating Interest Rates
Yet, there are a few challenges that must be taken into account:
Planning with accuracy is a difficult
It is almost impossible to predict your EMIs with utmost precision. Markets can take sudden hits and booms, and so, it will affect the planning process, too.
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Needs immaculate knowledge of the market
It would be best if you fathomed the market forces well to make this option beneficial for you. Without it, the risk can balloon.
Another reason why floating interest rates for home loans can be tricky is that they demand risk appetite. One has to understand that the market can take hits at any time. Therefore, one must be ready to brave it.
Especially in the current times, the volatility of the market is heightening with every passing day. So, it is crucial to absorb the fact.
Difference between Fixed and Floating Interest Rates for Home Loans
The financial viability of a home loan depends upon the interest rate charged against it. Generally, banks charge two types of interest rates on home loans: fixed interest rates and floating interest rates. Both come laced with their benefits and disadvantages. These can determine a lot of the dynamics of your financial well-being. Hence, a thorough analysis is essential before opting for either.
In 2021, fixed home loan interest rates in India can differ greatly from floating interest rates for home loans. Instead of looking only at the cheapest mortgage interest loans, it is necessary to look at all the elements together. Such aspects are numerous: tenure of repayment, lending organizations, and requirements, the process of obtaining a loan, the feasibility of the plans, market trends, and the like. It is crucial because none of them functions exclusively. They influence each other greatly.
Can Floating Interest Rates be changed into Fixed Interest Rates and Vice Versa?
With the above-listed merits and demerits of fixed and floating interest rates, it may not be easy to choose either. This decision depends upon your financial status and perspective. Hence, in this section, we explore the possibilities bestowed other than fixed and floating interest rates for home loans.
You can opt for a combination loan in which the interest charged would be an amalgamation of fixed and floating rates. Time-bound fixed interest rates are combination loans. For the first few years of the loan tenure, the interest charged against it remains fixed. Then, it metamorphoses into a floating interest rate loan.
Switching from one rate to another
Sometimes, even with the most immaculate planning, market circumstances can alter dramatically. This may render everything haywire. In such situations, it is possible to switch from one interest rate to another. There is no rule as to when it must be done.
It implies that we can switch from floating to fixed interest rates or fixed to floating interest rates. However, the bank may charge a fee from you upon this conversion. Generally, up to 2 percent of the loan amount is taken as the levied fee.
How to Choose Between Floating and Fixed Rates in India in 2021?
Opting for Fixed Interest Rate:
One must opt for a fixed-interest rate loan when the loan amount is low.
One must also study the market trend; if the interest rates are bound to rise, it is better to choose fixed rates. Or perhaps, if the current rates are low, you can lock in the amount at that rate. That shall equip you with stability.
One must note that in fixed interest rate home loans, there is a prepayment penalty.
Opting for Floating Interest Rate:
Floating interest rate changes based on the changes in the lending party’s base rate.
Hence, if you foresee a drop in the interest rates in the future, floating rates can be ideal.
They equip you with the desired flexibility needed in financial endeavors. Even if you are unsure of the market trends, floating interest home loans should look like a suitable option.
Moreover, if risk-taking suits you, these can prove sound in the long run.
There is also no prepayment penalty in such home loans.
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Best Fixed Interest Rate Home Loan Providers in India 2021
Home loans facilitate easy buying of properties at a determined rate of interest. The borrowed amount is repaid over a while in smaller amounts, known as EMIs. EMI stands for equated monthly payments.
Multiple entities are providing these loans at reasonable costs (interest rates). LIC Home Loan, HDFC Bank, SBI are all revered institutions with simple and cooperative processes. The documentation required by these organizations is simple and fuss-free, gets into the cycle fast, and caters to all sorts of needs and worries of the borrowers. Usually, their tenure extends to 30 years. One must also consider the processing fee levied by these institutions.
The schedule below depicts some of the top institutions with their fixed interest rates.
|S. No.||Lending Entity||Interest Rate (in %)|
|1||HSBC Bank||N/A Fixed Rate|
|2||HDFC Home Loan||7.40 – 8.20 Fixed Rate|
|3||Axis Bank Home Loan||6.90 and up Fixed and Floating Rates|
What are the Cheapest Mortgage Interest Loans Available in India
Taking a home loan can fetch multiple definitive decisions. Nevertheless, it is pivotal to study the costs before taking one. Crafting an intricately designed budget is essential to sustain your financial well-being. One of the most integral elements of fetching a home loan is the calculation of interest payment.
For the mortgage interest calculator, the following is the formulae to do so:
M = P[r (1 + r) ^ n/ ((1 + r) ^ n) – 1)]
M = Total monthly mortgage payment
P = Principal loan amount
r = monthly interest rate
n = total number of payments during the loan tenure
One must take into account the mortgage rate charts and mortgage interest rate trends. They can help predict future trajectories.
Presently, the rates have reduced significantly. Currently, Kotak Mahindra Bank is demanding the cheapest home loan interest rate in India. It is only charging a 6.65% interest rate. Its EMI options start from ₹641 per lakh.
Following it, HDFC and ICICI Banks lead as the second cheapest home loan providers by charging a nominal rate of 6.70%. Their EMI payments begin at ₹646.
State Bank of India (SBI) is charging an interest rate of ₹6.95%.
The following chart illustrates the interest rates charged by different banks along with their EMI options in India.
|S. No.||Lending Institution||Interest Rate (in %)||EMI/Lakh|
|1||Kotak Mahindra Bank||6.65||₹641|
|4||Bank of Baroda (BoB)||6.75||₹648|
|5||Punjab National Bank (PNB)||6.80||₹652|
|7||Central Bank of India||6.85||₹655|
|9||LIC Housing Finance||6.90||₹659|
|10||State Bank of India (SBI)||6.95||₹661|
One must also look at the processing fees charged by each of these as they differ.
Hence, in present times, fixed interest rates should be chosen as they provide the much-need stability. The uncertainties accounted for the need to be nullified to gain security. Fixed interest rates can provide the cushion to bear the impact.
However, if your risk appetite is high and you foresee the market interest rates taking a plunge, floating interest rates may be more suitable to you. They are several organizations providing the option of home loans on floating interest rates.
What may be good for one may not be feasible for another. This is because such financial decisions need to bespeak and tailor-made. It considers one’s monetary strength, risk appetite, future goals, and several other factors. Hence, the resultant idea for two individuals may differ entirely.