Understanding the Benefits of Floating Interest Rates

Borrowers planning to avail of a home loan are advised to choose two things carefully — loan tenor and the home loan rate of interest as both have deeply impact a borrower’s repayment capacity and ability to repay loan on time. Borrowers are advised to keep their loan tenor short to reduce their total interest outgo. However, the smartest thing to do is to keep the loan tenor as short as possible while keeping one’s EMIs as affordable as possible. Borrowers are also advised to negotiate for the lowest home loan interest rate they can get as home loan interest rates have a direct impact on a borrower’s EMIs, total interest outgo as well as the total cost of borrowing the loan. Low home loan interest rates translate into affordable EMIs. Further, they also lead to reduced total interest outgo and therefore, reduced cost of borrowing too. High home loan interest rates, on the other hand, lead to high EMIs as well as increased interest outgo. High home loan interest rates can also make home loans unaffordable. Home loan borrowers must, therefore, do their research and make sure they are availing of a home loan on the lowest interest rate possible. 

Home loan borrowers must also know that home loan interest rates are of two different types: floating and fixed. Fixed home loan interest rates are independent of the external market conditions and remain the same through the tenor of the loan. Floating interest rates are also known as variable home loan interest rates. These interest rates are tied to external market conditions and an external benchmark, such as the Repo Rate. Any changes in the external benchmark causes the home loan interest rates to fluctuates. For instance, if you have opted for a Repo rate-linked home loan, when RBI reduces the Repo Rate, your home loan EMIs will become cheaper and vice versa.

Floating interest rates offer several advantages over fixed home loan interest rates. In this article, we look at reasons why borrowers must opt for floating home loan interest rates. 

Benefits of Floating Home Loan Interest Rates 

1. They Are Cheaper 

Lenders decide the home loan interest rate to be offered to a borrower depending on the risk posed by them to the lender. Lenders consider fixed interest rate home loans to be far riskier than floating interest rate home loans as the lender stands to lose a lot of money in case the home loan interest rates go down during the tenor of the loan. Therefore, when borrowers choose to opt for the fixed interest rate regime, lenders charge a higher rate of interest. In comparison, floating interest rate home loans are cheaper and allow borrowers to save a considerable amount of money over the tenor of the loan. 

2. Borrowers Stand to Benefit from Unexpected Gains 

After the Covid-19 pandemic, it felt like the world economy will never revive. However, for the real estate sector and borrowers who had availed of a loan on floating interest rates, the pandemic proved to be a blessing in disguise. After the pandemic, to give a boost to the ailing real estate sector, lenders reduced the home loan interest rates to the lowest they had been in a long time. Thus, the EMIs of people who had availed of home loans on floating interest rates reduced considerably and therefore, they were able to save a lot of money. In conclusion, floating interest rates are beneficial as they often give home loan borrowers a chance to build up savings from time to time.

3. Borrowers Who Have Availed of a Home Loan on Floating Interest Rates Can Switch Lenders at Any Time Without Paying Any Penalty 

Most lenders offer a home loan balance transfer facility these days. Using this facility, borrowers can transfer their home loan from their current lender to another offering better loan terms and conditions. In most cases, borrowers opt for a home loan balance transfer when another lender is offering them a much lower interest rate or when they want to change their loan tenure or avail of a top-up loan. In any case, borrowers on fixed home loan interest rate regimes are charged a penalty by their lender if they decide to foreclose their loan and opt for a home loan balance transfer. On the other hand, as per RBI’s mandate, individual borrowers on floating interest rates can foreclose their loan account and switch lenders at any point in their home loan journey without paying any penalty. 

Final Word

Floating Interest rates offer several advantages over fixed interest rate home loans, the most important being floating interest rates are cheaper than fixed interest rate home loans, and therefore, borrowers get to save a considerable amount of money over the tenor of the loan by being able to reduce the effective cost of borrowing the loan. The only advantage that fixed interest rate home loans have over floating interest rate home loans is that budgeting in the case of fixed interest rate home loans is easier as the EMIs remain constant through the tenor of the loan. Home loan borrowers must avail of a floating rate of interest if they think that the home loan interest rates will go down in the future. If they are sure that the home loan interest rates will increase, they must go for the fixed rate regime.

Related Posts

60110719 0 image a 65 1657493334168

What a New Vaper Can Learn from a Disposable Vape?

If you are thinking of quitting smoking through disposable Vape, then there are some factors that you must undertake. You must first understand what type of disposable…

gold g835425fe1 1280

Four factors affecting gold loan interest rates

The fact that gold can be pledged to pay for unexpected cash needs, such as medical bills, vacations, children’s education, business expansion, and even putting a down…

cashback softwere

What is the advantage of a cashback reward program?

Web based shopping has become exceptionally huge business over late years, thus far 2010 has ended up being an extended period of additional development cashback reward. In…

money g5cf11a6ce 1280

How To Avail Tax Benefits on Joint Home Loan

A home loan is a long-term financial obligation that requires extensive financial planning due to the risk of losing your property if you are not cautious with…

Photovoltaic Materials Market

Photovoltaic Materials Market Size, Share, Price, Trends, Growth, Report, Forecast 2023-2028

The new report by Expert Market Research titled, ‘Global Photovoltaic Materials Market Size, Share, Price, Trends, Growth, Report and Forecast 2023-2028’, gives an in-depth analysis of the global…

Does bleach kill roaches

Does Bleach Kill Roaches? The Real Facts

Cockroaches are tracked down on pretty much every edge of the house overall. So does fade kill insects? End up like that. We simply need to free…

Leave a Reply

Your email address will not be published. Required fields are marked *