The most important factor aspect of a home loan is the interest rate at which you will borrow. But there is a major dilemma many home loan seekers often face – whether to go for a floating (or variable) interest rate home loan or a fixed rate home loan?
When you take out a loan and you sign up for a fixed rate, you have to pay the same equated monthly installment (EMI) over a fixed period of time. This could last until the loan is fully repaid, or it can be reset at fixed intervals. The benefit of a fixed rate home loan is that the installment amount remains constant since the interest rate is fixed for a particular tenor, thus allowing the customer to budget their financials over a longer period of time. However, if interest rates drop, a fixed rate customer will not be able to take advantage of lower interest rates. On the other hand, if interest rates rise, the customer will not be affected.
Floating interest rates can change at any point of time. This can be good if the interest rate decreases, meaning you pay less than if you would have had a fixed rate, but when it increases, you will have to pay more. Floating interest rate home loans typically compromise of a base rate plus a margin.
Banks benchmark their rates against rates such as the prime lending rate, base lending rate, etc. Most of the banks use their own internal index that will determine the floating rate they offer. Therefore, it is advisable to always check with the lender what type of index they use, and when they re-evaluate or adjust their index, which is usually done on a monthly or quarterly basis.
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