Buying your dream home is a matter of celebration as it comes through years of hard work, saving from your income and sacrificing your comforts. But how about managing the repayment journey for 20-30 long years? While a home is an asset, it should not turn out to be a liability later with excess interest payments on a home loan. Many of us still choose the wrong home loan interest rate option and end up paying way more than expected.
So, What Types of Home Loan Interest Rates Lenders Typically Offer?
Lenders offer home loans at various types of interest rates. These include floating, fixed and a combination of fixed and floating.
Let’s examine these types that you must consider before applying for a home loan.
Evaluating Fixed Home Loan Rates First
Fixed home loan interest rates mean the rate of interest will remain the same throughout the loan tenure. There will not be an impact of the increase or decrease in the RBI repo rate on a fixed home loan repayment journey.
Does that spell good for you as a borrower? Not at all! Even as there will not be any change in interest rates throughout the loan tenure, you may end up paying way more than expected. Because the rates offered here remain predominantly in the range of 12-15%. Imagine paying a 50-lakh home loan at 14% for 20 years. Massive outflow guaranteed! The home loan EMI calculator says your total interest payment will be around INR 1 Crore, double the loan amount.
Are Floating Home Loan Interest Rates the Best Option?
Floating home loan interest rates imply the rate will keep changing based on the change in the RBI Repo Rate. What’s more, banks have started pricing home loans for borrowers based on the Repo Linked Lending Rate since 2019.
So, the proportion at which the Reserve Bank of India (RBI) cuts or raises the repo rate based on the macroeconomic environment of the country, banks will make changes to the home loan rates in that proportion only, ensuring utmost transparency in home loan pricing.
There is a spread too that banks charge over the Repo Linked Lending Rate. However, the spread remains fixed for someone with a good credit score.
As of now, floating home loan interest rates range from 8.50-9.90% per annum. Over 20 years, the 50-lakh home loan will lead to an interest payment worth INR 57 lakh (approx.) an assumed interest rate of 9% per annum.
Also, when the rates remain low for a substantial period, the loan might get over before the original tenure. The lower rates for a longer period will ensure more payment of the principal outstanding, which will mean the eventual payment will be less than what the home loan EMI calculator might suggest when taking a loan.
A Teaser Home Loan Rate – Shall You Go for It?
A teaser home loan is a combination of fixed and floating interest rates. Initially, the loan will be priced at a fixed rate before it converts into a full-fledged floating basis. Banks and housing finance companies (HFCs) typically offer a home loan at a fixed rate for two-three years before converting it into a floating. As someone new, you might be tempted to accept this as it comes with the effect of fixed and floating rates. But again, the eventual payment will be more than a pure floating-rate home loan.
Wrapping Up
A home should only create an asset and not a financial burden for you. Choosing the best home loan interest rate type is critical to lower your repayment obligations. The floating rate allows you the same. For interesting insights into finance and other important matters, stay connected with zarooribaathai.in – The Voice of Truth.
