Summary of this article
Most banks and financial institutions do not charge any prepayment penalties for floating rate home loans. This feature enables you to make extra payments or finish your loan repayment ahead of schedule without paying any additional fees.
Broadly, there are two types of home loans available in the market based on interest rates – fixed rate home loans and floating rate home loans. Among these two, floating rate home loans are a common choice owing to their potential for lower interest rates and flexibility.
The interest rates for these loans stems from a benchmark rate which generally follows the Reserve Bank of India (RBI) repo rate. Your home loan interest rate will vary with changes in the benchmark rate. The following information will help you understand floating-rate home loans and choose the right option for your new home.
Understanding The Mechanics Of Floating Rate Home Loans
The interest rate on a floating rate home loan tends to be lower than the starting rate of a fixed-rate mortgage. The loan interest rate fluctuates during the loan period because it depends on how the benchmark rate changes. If the benchmark rate increases, then your loan interest rate will also go up, which means you will pay more on your EMI. Your loan interest rate and EMI will decrease when the benchmark rate goes down.
Top Benefits
Potential for Lower Interest Rates: The initial interest rates of floating rate home loans tend to be lower than fixed-rate home loans. The savings can be more when interest rates start to drop.
Rate Cuts and No Prepayment Penalty: Whenever the RBI reduces the repo rate together with the benchmark rate, that leads to a decrease in floating rate home loan interest rates. That reduces either your monthly payments or the total duration of your loan.
Most banks and financial institutions also do not charge any prepayment penalties for floating rate home loans. This feature enables you to make extra payments or finish your loan repayment ahead of schedule without paying any additional fees.
Drawbacks
Interest Rate Risk: The main drawback of floating rate home loans is that borrowers cannot predict how interest rates will change. The increase in benchmark rate will cause your interest rate and EMI to go up, which will disrupt your ability to plan your finances.
Fluctuating EMIs: The EMI amounts for floating rate home loans fluctuate based on benchmark rate changes, which creates an unstable financial situation.
Factors To Weigh Before Opting For A Floating Rate Loan
Market Trends: Evaluate the present economic situation together with current interest rate movements. Floating rate home loans serve as a useful option when interest rates follow a pattern of stability or decline.
Loan Tenure and Risk: Floating rate home loans function better as long-term financing solutions. The chance of receiving interest rate reductions becomes more likely when you stay invested for longer time periods. Think about how much risk you can handle. You should select a floating rate home loan when you can handle financial risks and remain at ease with your changing EMI payments.
Financial Planning
Your financial plan needs to have strong foundations to handle different EMI payment amounts. The plan requires an emergency fund together with extra income resources to protect against possible interest rate increases.
Borrowers can benefit from floating rate home loans because these loans provide access to lower interest rates and no prepayment fees. The payment amounts, however, can go up or down because of changes in the benchmark rates.
