Availing a home loan for financing your decision of purchasing a house is a decision that requires some searching to be done. It also requires a careful examination and comparison of the lending options available to determine the best possible option for availing funds to purchase the house. There are factors like loan tenure, loan amount, interest rate, eligibility criteria, etc. which need to be considered when selecting the right lending option.
When it comes to home loan rates, there are two types of interest rates- the fixed interest rate and floating interest rate. Both have their defining traits and have their advantages and disadvantages. Where a fixed rate of interest may prove beneficial under certain conditions, a floating rate of interest proves beneficial under other conditions. Just like a slight change in interest can increase your financial outlay towards loan repayment, similarly, the type of interest rate can significantly influence your financial outlay during the tenure of a loan. This article seeks to explain some facts about interest rates and address some questions related to the topic.
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How do fixed home loan rates work?
The home loan rate is the amount of interest payable by you on the loan amount expressed in percentages for a stipulated period. This interest rate for home loans is of two types:
- Fixed-rate of interest
- Floating Rate of interest
- The fixed rate of interest is the interest rate fixed at a certain percentage which remains unchanged during the entire tenure of the loan.
- No matter how the market conditions or prevailing interest rates change, the fixed rate of your home loan will remain unadjusted and hence unchanged.
- For instance, if your home loan amount is Rs. 100,000 and your interest rate is 11% p.a., the (simple)interest amount payable on the loan for 1 year is Rs. 11,000. If the tenure of the loan is for 7 years, and the prevailing market conditions drive the prevailing interest rates in the market down or get them reduced to 9% p.a., the interest rate on your home loan will not change correspondingly because it is fixed to remain at 11% irrespective of the fluctuations in the market conditions.
Are home loan rates expected to rise?
Since home loan rates on home loans are of two types, the second type of interest rate i.e. the floating rate of interest is a type of which adjusts according to the fluctuations in market conditions or changes in prevailing interest rates.
- Thus, floating interest rates can rise during the tenure of a loan.
- For instance, if the loan amount is Rs. 100,000, the floating interest rate is 13% p.a. and the tenure of the home loan is 15 years. If the prevailing market conditions were to cause the prevailing interest rates to rise, the floating interest rate in your home loan will be accordingly adjusted to reflect the change in the market conditions and prevailing interest rates. It could rise by a few percentage points like 1% or 2%.
- If the market conditions are volatile, the floating rates fluctuate accordingly and maybe confused until the market stabilizes.
- Thus, home loan interest rates can fluctuate and may be expected to rise if the market environment displays such signs.
Can I change my home loan rate from fixed to variable?
You have availed a home loan with a fixed home loan rate and then the RBI decides to lower home loan rates given the prevailing market conditions and to encourage demand for real estate property. And you want to capitalize on this situation.
- You can approach the bank from where you have taken the loan and apply to have your home loan interest rate converted from fixed interest rate to floating interest rate at any point of time of your home loan tenure.
- The bank will accept this application and will usually levy a nominal fee for converting the fixed interest rate into a floating interest rate.
- This option gives you some degree of flexibility in your choices of home loan interest for it is very difficult to predict when and how these interest rates change and leave you wanting to change your decision.
- The facility of changing the type of interest rate levied on home loans is offered by major banks and lenders and is relatively easy to avail.
- There is another option you have and this may be exercised when you decide to take out the home loan itself.
- Banks like HDFC offer to provide home loans with combination rates that allow you to repay the loan amount at a fixed interest rate during a certain period of the loan tenure and then repay the loan amount at floating interest rates when you find it favorable to do so.
What are the switching charges?
A home loan borrower can decide to transfer their loan to a new lender from their existing one after assessing and comparing the lending options. In this case, the existing lender levies switching charges on the borrower to make the switch and transfer the loan amount to the new lender at the behest of the borrower.
When you buy a house, you make a significant investment that will influence your lie for several years if not decades. Over and above that, if you choose to purchase a house using a home loan, you need to exercise great caution. The financial outlay towards home loan repayments is periodic and the tenure of a loan maybe decades. Thus, long after your income starts falling, you may still find yourself saddled with the obligation of repaying the loan.
So, you need to choose your lending options available to you carefully with special attention paid towards the interest rate and the type of interest rate. Even if you choose wrong you can change the type of interest rate at your convenience or when you find it favorable to do so. By making an informed decision on the interest rates, loan tenure, loan amount, etc. you can regulate and control your financial outlay towards repayment of the loan to a certain degree and save money in the process.