There are two types of interest repayment options being available for the borrower. One is the fixed interest rates, and another is the floating interest rates. In the case of the fixed interest rates, the interest rates remain fixed irrespective of the changes in the interest rates in the markets. While the floating interest rates are the ones in which the interest rates being charged to the borrower fluctuate according to the market conditions. The interest rates may either increase or even decrease as per the market conditions. Whenever the Reserve bank increases the Repo rate, the interest rates increase, while whenever the Repo rate of RBI decreases, the interest rates decline. In recent times the interest rates have continuously been declining due to the fall in the Repo rate of the RBI. The floating interest rates are more recommended and affordable to the borrower compared to the fixed ones as the borrower can save money due to the decline in the interest rates. Also, the bank charges lower interest rates as in the case of the floating ones while the fixed interest rates higher interest rates are being charged to the borrower.
The tenure of the loan can get reduced in case of the lower interest rates being charged. As the interest rates decline, the liability of the borrower gets reduced. These days the interest rates are being charged at 6.50% onwards to the borrower. Thus the interest rates for home loans are quite attractive to the borrower. Thus it is better to opt for floating interest rates to the borrower. The bank charges processing fees to the borrower, around 0.50%-1% of the total loan amount, or else Rs.10,000, whichever is lower. The floating interest rates vary according to the market conditions, and thus it may happen that sometimes the borrower may have to pay increased interest rates as well to the borrower. It is not always necessary that the borrower save money on the interest repayment, but the interest rates are mostly on a decline. The Government of India wants to make the loans more and more affordable to the borrowers; thus, the government aims to increase the disbursement of loans to the public. Also, the higher disbursement of loans boosts the economy as more money gets introduced into the markets. Thus all these factors also increase the demand for housing in the markets.
Information about the floating interest rates
- Benefits of floating interest rates to the borrower
The interest rates in the case of floating ones can help the borrower save money on repayment if the interest rates get reduced at a later stage after availing the home loans. Also, the tenure of the loans may get reduced in case of a lower repayment amount. Also, the interest rates charged during the closure of the loans are lesser than the fixed interest rates being charged to the borrower. Even if the interest rates go up, then for a shorter period, the borrower may have to repay a higher interest amount or installment. Still, in a later stage, the interest rates may come down eventually, which may benefit the borrower.
- Limitations of floating interest rates
Sometimes, a clause could have been added in the agreement putting a cap on the lower limit of the interest rates being charged to the borrower. Thus if the interest rates if goes down drastically, then, in that case, the borrower may not benefit from that case. Also, in the case of floating interest rates, the borrower may not be aware of the total repayment value of the loans as the interest rates may keep fluctuating as per the market conditions. Thus the borrower cannot get the exact idea of the repayment value. And even a slight increase in EMI can increase the installment amount significantly.
The floating interest rates are beneficial to those who do not mind adjusting their repayment budget according to market conditions. Otherwise, opting for fixed interest rates is a better option.
To benefit from lower interest rates, it is beneficial that the borrower should avail repayment on floating ones as this can help the borrower significantly reduce the liability of the interest repayment. But the borrower needs to be flexible while availing of home loans on floating ones as the interest rates may sometimes increase, thus increasing the liability on the borrower.