Applying for a home loan is the easiest way to finance your real estate investment dreams. However, there are two types of housing loans you can opt for based on the demands of the borrower. These are the fixed home loans and floating home loans. Both these types of loans are easily provided by all leading commercial banks and housing finance organisations. But which one is better? Let’s find out.
What are Fixed home loans?
Fixed home loans are the loans which are offered with a fixed interest rate over the entire period of the tenure. The period of the loan is also fixed. This type of loan does not get affected by the fluctuating market conditions. However, you may have to pay a prepayment penalty for a fixed home loan which is approximately 2% of the total loan value.
Pros of fixed home loans:
- A fixed home loan offers a fixed interest rate and does not depend on the financial market.
- You can plan your monthly finances with ease.
- There is a fixed certainty in the repayment of the loan.
- It offers you peace of mind as you know how much you need to be paying.
Cons of fixed home loans:
- The fixed interest rate to be paid is usually higher than the rate offered by floating home loans
- Even if the market rates drop, you need to pay the fixed interest rate you signed up for
- You need to pay a prepayment penalty for a fixed home loan.
What are floating home loans?
A floating home loan is a housing loan in which the rate of interest varies. Both the base EMI amount and the rate of interest vary based on a benchmark rate fixed by the central bank known as the Prime Lending Rate. Commercial banks and housing finance companies are not authorised to lend loans below this rate. Hence, the fluctuation of this rate leads to the fluctuating rate of interest of the floating home loan.
Pros of floating home loans:
- The rates of interest offered by floating home loans are cheaper than fixed home loans.
- Due to its fluctuating nature, even if the rates of interest increase, it is only for a temporary period of time.
- Often, in floating home loans, you end up saving more in terms of repayment of the loan.
- Choosing a floating home loan is a better option if you are applying for a higher loan amount.
- There is no prepayment penalty for a floating home loan.
- You can switch your floating home loan for an inexpensive loan in the same bank or to another bank with a minimal switching fee. On the contrary, this process cannot easily be done in the case of a fixed home loan.
Cons of a floating home loan:
- Since the monthly instalments are not fixed, it is hard to plan your finances.
- You will benefit from this loan only if the interest rates do not increase higher than a rate of 11%.
Apart from merely choosing between a fixed loan and a floating loan, you can also opt for a loan which is fixed for a part of the tenure and is floating for the rest of the period of the loan. Typically, these loans offer a fixed interest rate for the first ten years of the repayment period after which a floating rate of interest is applied. However, this kind of integrated loan can lead to an increased repayment period with a higher EMI to be paid during the extended period.
To sum it up, both fixed home loans and floating home loans have its own set of benefits and drawbacks when scrutinised from an investment angle. However, it is better to opt for a fixed home loan if you want to be certain of your expenses, whether you are planning to buy an apartment or a villa. On the other hand, you can opt for a floating home loan if the fluctuating market conditions do not bother you much or if you are applying for a larger amount of loan.
Also, if you are planning to buy a house, make sure you check out our extensive guide to property insurance. Head out to Radiance Realty today and find your dream home in an address that gives you the best of everything.
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