You have to decide your budget, what you can afford each month in EMIs, and another vital point, the interest type you choose. Banks offer the choice of fixed, floating, or a hybrid rate.
Fixed Rate of Interest
On a fixed interest loan, the rate is fixed at the time of loan sanction and it stays fixed for at least a few years.
The advantage here is that you would know how much you have to pay each month in EMIs. The rate does not fluctuate frequently based on market movements. However, if interest rates fall, you will not get the benefit.
You can use the Home Loan EMI calculator to calculate the EMI amount on the loan and decide the loan amount you can afford.
Floating Rate of Interest
Interest rates on home loans with a floating rate of interest varies with market movement. Usually, floating rate of interest is lower than the fixed rate. Still, if the interest rate moves up, you will have to shell out more for your EMI.
You also get the benefit if the market rate moves down. In this type of loan, your EMI cannot be clearly calculated as the interest rate varies frequently.
Semi-Fixed Rate of Interest
Your home loan lender may offer you the option of a hybrid interest type. In this kind of loan, the interest rate stays fixed for the first few years. It then changes to floating rate. Here, you can be sure about the EMI amount for the initial years, and choose the loan amount and tenure accordingly.
Which One Should you Choose?
The type of interest you choose depends on many factors. Fixed rate gives you a clear idea of what you have to pay each month. It lets you plan your monthlybudget accordingly and you avoid risks in the form of EMI fluctuations and the chance of having to pay higher interest. Still, you also miss out on the chance of lowering your EMI if the interest rate comes down.
In Floating Rate loans, you have to be prepared to deal with variations in the EMI and you cannot plan on paying a fixed amount on the loan. The interest rate might come down, reducing your EMI. However, the opposite might happen and you will have to pay a larger amount as EMI than you planned for.
In a Semi-fixed Rate, you EMI stays steady for a few years and then fluctuates as the rate changes to floating rate. This might be advantageous for those who expect their income to rise in the future but want the safety of steady EMIs for the first few years.
Usually, if you expect interest rates to go up in the near future, you opt for a fixed rate loan to lock in the interest rate at the current lower rate. If rates have been on the rise over the past few years and the prediction is for a fall in loan interest rates soon, choose a floating rate loan to reap the benefits. If you expect the rate to go up and then fall after a few years, choose a semi-fixed rate of interest.
Some Points to Remember
- Home Loan Interest Rates never stay fixed for the whole tenure of a long-term loan like a Home Loan, even on fixed rate home loans
- The lender reserves the right to revise the interest rate on a fixed rate home loan every five years or so. So, your interest rate could go up during the tenure
- On floating rate loans, the lender seldom passes on the benefits of lower rates quickly to existing customers. So, even if the market rates are lower, you may still be paying higher interest on your loan
- According to RBI Guidelines lenders cannot levy prepayment penalties on floating rate loans.