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Finance

What Are Fixed Interest Home Loans and What Do You Need to Know about Them?

Sakshi and Mohit are very excited about the new property they have shortlisted. They approached different lenders to check their home loan eligibility and secure the best home loan for purchasing their new home. However, they are still unable to decide whether they should opt for a fixed-interest home loan or a floating-interest home loan.

Just like them, most home buyers face this dilemma.

Interest cost is of crucial importance when taking a home loan. Since a home loan typically has a tenure of 20 to 25 years and you would be paying interest throughout the tenure of the loan, it is crucial to figure out whether a fixed home loan interest is better for you or not.

What are fixed-interest home loans?

A fixed-interest home loan is a loan where the interest rate is fixed for the entire tenure of the loan, without any change whatsoever. The interest rate is the rate prevalent at the time of executing the loan agreement and remains fixed throughout the term of the loan. The lender levies interest at a fixed rate on the outstanding principal amount.

Some lenders also provide a variation to the fixed interest home loans where the interest rate remains fixed for a specified period (say 3, 5, or 10 years) and then changes to a floating interest rate.

How is the fixed interest rate determined?

Home loan interest rates are linked to the Reserve Bank’s repo rate. The repo rate is determined by the Reserve Bank periodically depending on various factors. Lenders usually add a margin to the repo rate, which becomes the lending rate.

In the case of a fixed interest home loan, the interest rate is determined based on the repo rate prevalent at the time of executing the loan and remains constant throughout the tenure of the loan. It does not change with the change in the factors affecting the market.

However, in the case of a floating rate home loan, the interest rate rises when the repo rate rises and falls when the repo rate falls. In other words, the home loan interest rates move in tandem with the Reserve Bank’s repo rate.

Solely for the reason that the flexibility to change with market dynamics is curtailed in a fixed home loan interest rate, the lender usually charges a higher rate as compared to floating interest rate.

You can use a home loan EMI calculator to compare the EMIs under different options.

When is a fixed-interest home loan advisable?

The choice of opting for a fixed or a floating interest home loan would depend on the specific circumstances of the borrower. However, in some cases, a fixed interest home loan would be more beneficial. For instance,

  • If you wish to have certainty in financial matters and are uncomfortable with the constant change in the rate of interest, a fixed-rate home loan may be advisable.
  • If you are planning to repay the home loan in a short span of 3 to 5 years (instead of the complete tenure of 20 to 25 years) and do not wish to be impacted by cyclical changes in the interest rates, you may consider opting for a fixed-rate home loan.
  • If the interest rates are currently low and are expected to rise in the near future, procuring a fixed-rate home loan could be like striking a pot of gold.

Conclusion

Opting for a fixed-rate or a floating-rate home loan depends upon individual preferences, circumstances, and financial profile. Many lenders also offer the flexibility of converting a fixed-rate loan into a floating one and vice versa.

The factors mentioned above can help you to select the option that suits you the best.

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