Home loans and their types of interest

SBI vs HDFC vs Axis: Which bank offers the best rates for home loans?

Buying a home is one of the major decisions in life. With more and more people viewing home ownership as a long term financial investment, it is imperative to understand that availing a home can create a significant impact in a home-buyer’s lifestyle. Getting a home loan is not a difficult task nowadays, thanks to financial institutions’ and banks’ assistance. But today, it is necessary to have a thorough knowledge on every single aspect when it comes to buying a home of your own. It is important to weigh in all the pros and cons before making an informed decision. Availing a housing loan requires a careful analysis, considering a long-term financial impact. It is very integral to understand the financial assistance that suits you in the long term.

Every prospective home buyer who needs to apply for a home loan has been in the dilemma about choosing the right option. There are a couple of choices and banks and other financial institutions offer both fixed and floating interest rates. It is essential to understand the nature of each type of loan and which is beneficial for you. Applying for a housing finance requires understanding the current market scenario before opting for a housing loan.

There are two kinds of housing loans:

  • Fixed Interest Rate

Repaying the home loan in fixed installment throughout the loan term is categorised as fixed interest rate. The virtues of this type of interest rate is, it does not get affected by market fluctuations. A fixed rate of interest brings a certain amount of clarity in terms of repayment schedule with a fixed monthly amount.

The biggest disadvantage of such a setting is that the fixed-interest-rate loans are anywhere between 1 to 2.5% higher than floating-interest-rate loans depending upon the bank and other financial institutions. Additionally, the borrower will need to continue repayment at the highest interest rate even if Government or Reserve Bank of India reduces the rate.

  • Floating Interest Rate

The floating interest rate varies with the market scenario. If you opt for a home loan with a floating interest rate, it means that you will be subjected to a base rate and a floating element will be added. The EMIs would fluctuate as per the market dynamics.

Due to the fluctuating nature of floating interest rates, the monthly installments will vary throughout the entire loan tenure, which can lead to difficulty in budgeting a fixed plan.

Both home loan options have their own merits and demerits. A fixed interest rate enables you to clearly plot your budget while a floating interest rate offers the advantage of reduced interest rates. It is essential to understand the fine print of both the types of interest rates and then choosing which one suits you the best.

The choice of a fixed, floating, or semi-fixed interest rate home loan, depends on factors such as the tenure of the loan, age of the applicant and prevailing market conditions