Deep Kaur 
Purchasing a house marks an important milestone in the lives of most individuals which is simplified through housing finance. However, the liability of high loan amounts coupled with long repayment tenors may put excessive pressure on one’s monetary resources if they do not plan for the loan judiciously. The effective home loan interest charged on their principal sum is a prime consideration for borrowers since a marginal difference in rates can increase or decrease the overall cost of credit. Hence, prospective home buyers constantly look for the most competitive interest rates and terms that do not hit their pocket.
Decoding Home Loan Interest Rates – Fixed v/s Floating Rate
Banks and lending institutions offer home loans with two types of interest rates: fixed and floating rates.
Fixed Interest Rate
As the name implies, this type of interest rate remains constant throughout the tenor regardless of market fluctuations. Choosing a loan at a fixed rate of interest suggests that you will be paying a specific EMI amount ensuring consistent financial obligations.
Advantages of Fixed Interest Rate
Some of the beneficial features of a fixed interest rate are:
- It remains the same even when the Reserve Bank of India changes the borrowing and lending rates.
- You won’t have to worry about market volatility.
- Borrowers can lock the interest rate per financial suitability.
- They can accurately assess instalment pay-outs enabling efficient credit planning.
Demerits of Fixed Interest Rate
At the same time, house loans secured at fixed rates of interest hold a few drawbacks such as:
- Fixed interest rates are usually 1.5% to 2% higher than floating rates.
- You can’t benefit from a drop in market rates.
- If the economy is on an upswing, you may be levied a higher home loan interest inflating your EMIs and making it difficult to even qualify for a housing loan.
Floating Interest Rate
Floating interest rates, on the other hand, are tied to market changes. They can vary periodically, so your EMI may go up or down according to economic conditions. These rates are linked to external benchmarks such as the repo rate or the marginal cost of funds-based lending rate (MCLR).
Merits of Floating Interest Rate
A variable interest rate is preferred by several borrowers due to the following reasons:
- Floating-rate loans work out to be cheaper in the long run.
- Whenever there is a rise or fall in the rates, lenders adjust the tenor accordingly to minimise the burden of credit.
- There are no prepayment penalties attached to floating interest-rate loans.
Disadvantages of Floating Interest Rate
A floating-rate house loan offers certain demerits like:
- Borrowers aiming for instalment stability cannot plan their finances as the home loan interest rate changes often.
- A hefty interest rate may impede one’s repayment pattern.
Fixed v/s Floating Interest Rate
The table below indicates some basic differences between the two home loan interest rates:
Fixed Interest Rate |
Floating Interest Rate |
| The housing loan interest rate remains unchanged | The interest rate on your home loan alters per lender’s benchmark in a fluctuating market |
| Fixed rates are generally high making your loan expensive | Floating rates are relatively lower |
| Fixed rates are preferred by borrowers who foresee an upsurge in future market rates and hope to repay loans within 3 to 10 years | Individuals who are unsure of market trends and expect to pay off loans within 20 to 30 years usually favour floating rates |
| Easier to budget and plan investments due to fixed obligations | Variable EMI outgo can complicate credit management |
| Lower risks involved | Increased risk due to unpredictable market swings |
Lenders may charge a certain fee for converting from one type of home loan interest to another i.e. fixed to floating or vice versa. Sometimes, depending on your tenor, a fixed rate may be applicable for a few years, after which, it may be revised into a floating rate loan impacting the ongoing repayments. So verify the lender’s terms and conditions to avoid confusion.
How to Reduce Home Loan Interest
In addition to the type of interest rate, keep these vital aspects in mind to reduce the interest outgo if you are thinking of securing a house loan or already have one:
Compare Interest Rates
Research loan products of various lenders to pick the most attractive deals. Compare their interest rates and other relevant details such as home loan eligibility, documentation requirements, etc. Armed with a solid credit history and the right CIBIL score for home loans, which is usually in the range of 750 and above, borrowers can expect preferential rates, especially during the holiday or festive season.
Consider Shorter Tenors
The interest outgo on your loan is directly influenced by the repayment tenor. Longer tenors reduce the monthly instalment amount but a shorter loan term cuts the payable interest. Hence, select the duration carefully so that you don’t end up paying more interest. Use a home loan EMI calculator to evaluate how a smaller tenor restricts your interest amount.
Opt for Prepayments
In the initial years of loan repayment, you pay more towards the interest compared to the principal. Regular prepayments lower the principal bringing down the overall interest. However, check for applicable prepayment or foreclosure fees with your lender if you have a fixed-rate loan. Lenders do not levy these charges on floating-rate loans.
Transfer Your Outstanding Loan
If the current lender’s rates seem high, switch your outstanding debt to another lender for competitive interest rates ensuring a cost-effective loan. But remember to factor in the associated cost of transfer before you go ahead with a home loan balance transfer.
Make a Bigger Down Payment
Lenders typically finance 75% to 90% of a property’s value. You will need to pay the remaining 10% to 25% of the price as a down payment. The more you pay upfront, lower the loan amount and payable interest.
Increase the EMI
If you have a salary hike and your lender permits annual EMI adjustments, choose bigger instalment pay-outs to shorten the tenor and decrease the interest.
Summing Up
Lenders may extend different options to minimise interest rates thereby reducing the debt liability. Weigh these alternatives carefully. Further, both fixed and floating interest rates could work in your favour as they hold distinct merits and demerits. A floating interest may be cheaper but can present budgeting challenges. While borrowers in their 40s may feel at ease paying fixed rates that spring no surprises, younger individuals in their 20s might prefer floating interest rates. Therefore, selecting either one must be based on financial convenience and loan objective after much deliberation.
