When a home loan is availed for financing a purchase of residential property, it is subjecting yourself to liability and simultaneously investing. You acquire a house, a valuable immovable asset at a significant price. Where the house is a long term asset, the home loan is also a long term liability where you make periodic loan repayments at a determined interest during the long tenure of a home loan.
The interest rate is probably the most important factor that decides the quantum of monthly EMIs you pay towards the repayment of the home loan. Home loan interest rates are of two type-fixed interest rates and floating interest rates. Interest rates may remain constant during the tenure of the home loan or may change accordingly in response to fluctuating market conditions or change in prevailing interest rates. The home loan borrower needs to carefully consider the interest rates on offer when selecting a home loan option. This article explains the concept of mixed interest rate and highlighting its benefits.
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What is a fixed interest rate when it comes to home loans?
A fixed interest rate is a type of rate of interest at which the borrower repays the home loan amount. This rate of interest as the name suggests remains mixed or unchanged during the tenure of the home loan tenure. The lending option selected by the borrower may have the interest rate fixed for the entire duration of the loan tenure or fixed for a certain portion of the loan tenure, but it remains unaltered for its set duration.
- A fixed interest rate may be tempting for borrowers who have a certain budget in mind or a repayment schedule and they want to repay the loan by following this schedule.
- The fixed interest rate allows borrowers to follow their repayment schedule because it remains unchanged during the tenure of the loan and borrowers can calculate or estimate their monthly EMIs without encountering surprises.
- Some borrowers go for hybrid options where for a certain period they repay the loan amount at a fixed interest rate and a variable (floating) interest rate for the remaining part of the loan tenure. For the period of fixed interest rate, the borrower enjoys certainty in making the payments towards discharging the loan liability.
- Fixed interest rates are usually at higher rates than floating rates.
Benefits of fixed interest rates
Fixed interest rates have certain benefits for borrowers which dictate their preferences:
- Fixed Interest rates offer certainty and stability when it comes to repaying home loan amounts. Due to interest rates remaining unaltered in the loan tenure, the home loan borrower need not worry about sudden changes or fluctuations in the interest rate which may lead to changes in the EMI amount paid by the borrower every month.
- Fixed interest rates may be given at higher rates than floating interest rates on home loans, but this is not always the case.
- When the market conditions get volatile and the prevailing interest rates are hiked in response to these volatile fluctuations, the floating rates also increase correspondingly. At such time, the floating rate gains percentage points which may push it higher than fixed interest rates.
- You do not need to worry about fixed rates during the time of volatile market fluctuations because fixed rates remain unchanged even in the face of such volatility.
- Fixed interest rates are beneficial when you have availed a home loan of long tenure and when overall interest rates are low. This is because borrowers seek to lock the interest rate at a particular level and even if prevailing interest rates are pushed lower, it is not prone to fluctuate further.
Drawbacks of fixed interest rates
The fixed interest rate option has certain drawbacks which are the following:
- Fixed interest rates are offered higher than floating interest rates. This may result in significantly greater financial outlay towards the repayment of the home loan. A fixed interest rate could be offered at a few percentage point higher than the floating interest rate.
- A borrower stands to significantly lose in terms of finance if s/he avails home loans with fixed interest rates at a time when the prevailing interest rates are high. If the market conditions were to fluctuate and push the prevailing interest rates down, the borrower does not gain from the fall in rates.
The disadvantages of fixed rates can be remedied by the borrower sailing combination or hybrid lending options where s/he can repay the loan for a certain period on a fixed interest rate basis and the remaining period on a floating interest basis.
This is particularly useful when you have other loans you have to repay and have to follow a tight repayment schedule. Thus, during this schedule, you can choose to repay the loan on a fixed interest basis and when the other obligations have ended, you can switch and convert to repaying the loan on a floating interest rate basis for the remainder of the tenure.
Fixed vs floating comparison table
Interest rates are a significant factor that influences your financial outlay when it comes to discharging your loan liabilities. Due to a home loan being a long term obligation, the number of the frequency of EMIs can take a toll on your financial health. It is for this reason that you have to examine every lending option available to you very carefully. You need to ascertain the prevailing market conditions and interest rates to decide on the rate of interest you would like zero in on.