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When opting for a home loan, buyers have a choice between three types of schemes – fixed, semi-fixed and floating interest rates. Choosing the correct scheme can be a tricky affair. Various factors can affect buyers in short and long term, if a wrong home loan scheme is selected.
Adhil Shetty, CEO of BankBazaar.com, explains, “In a home loan with a fixed rate of interest, the equated monthly instalments or EMIs will remain constant over the tenure of the loan. It is useful to opt for this if interest rates have bottomed out. However, fixed rates are usually higher than floating rates at any given point. On the other hand, for floating interest rate loans, the EMIs would fluctuate as per the market dynamics, as interest rates increase or decrease.”
A semi-fixed rate home loan is a combination of fixed and floating rates. The interest rates on such loans remain unchanged for a specified period of time, after which, the rate of interest is converted to floating.
What suits you?
Experts point out that when interest rates were rising, very few banks and financial institutions were willing to offer fixed rate loans. They were charging at around two to three per cent higher than the prevailing floating interest rates. However, now that interest rates are on a downturn, banks have cut the margin spread and are trying to woo customers, with fixed and semi-fixed rate loans.
A home loan seeker, must analyse all the factors before finalising a loan and opt for a scheme that best suits his/her needs and not be lured by the bank’s lucrative offers.
Comparison table: Floating vs fixed vs semi-fixed rate loan
“Nowadays, banks are providing flexible tenures for repayment of loans, for a maximum period up to 30 years as per their requirement/eligibility. Some websites and newspapers also give a comparative analysis of housing loan schemes of various banks,” points out RK Gupta, ED, Bank of Maharashtra. Loan seekers can visit the websites of various banks, to get details of housing and other loan products and select a suitable bank accordingly, adds Gupta.
“The type of interest rate you choose, has an impact on the monthly EMIs you pay. It is important that one should know the difference between fixed rate home loan and floating rate home loan,” advises Gupta.
Market conditions and its bearing on interest rate schemes
Multiple rate cuts by the RBI, indicate that the market is entering a period of low interest rates and the same is likely to fall further, in the coming years.
After a series of rate cuts, the RBI is now focusing on its transmission and has been urging banks to pass on the rate cuts to customers, through their lending rates. Consequently, banks may reduce their rates, which would benefit borrowers of floating rate home loans.