How do I choose the Right Home Loan for me?

Table of Contents

What type of loan is best for buying a house ?

We all need a sweet home, but in today’s scenario purchasing a house is very costly and it is like a lifetime achievement. Everybody does not have such a huge amount at once to buy a home, so they need a home loan from a financial institution. The amount of money you borrow comes with an interest which can be either a fixed interest rate or a floating interest rate. You have to choose any one of the interest rates as per your needs. But here the question arises what is the difference between these 2 interest rates and how does this affect the monthly EMI and overall interest cost? Here we will discuss about floating rate of interest in home loans in India and its advantages and disadvantages.

What is Floating Rate of Interest in Home Loan ?

A floating rate of interest, in other words, a variable rate of interest, is not fixed monthly interest but depends upon the current market lending rates, If you opt home loan with a Floating rate of interest, your monthly EMI may change during the loan period i.e. EMI will increase or decrease as per the interest rate. The floating interest rate is based on the criteria set by RBI & it is called MCLR (Marginal Cost of Funds Lending Rate). All these changes depend on changes in the repo rate by RBI. The rate at which RBI lends money to other banks is called the Repo Rate. So MCLR change depends on the RBI repo rate.

How is floating interest calculated?

In a floating rate of interest on the home loan, there are 2 parts and both are added:

The minimum rate (as per RBI Guidelines) below which the lender cannot lend and this changes from lender to lender.
Additional amount i.e. a margin, that a lender (financial institution /banks) charges to cover its risk and profit. This can vary as per loan amount, credit score, and some other details as set by lenders (financial institutions/banks).

Suppose the MCLR of a lender is 7% and the margin is 0.8%, adding both 7% + 0.8% = 7.8%, will be the floating rate of interest on the home loan.

What are the advantages and disadvantages of fixed and floating exchange rates?

What are the benefits of a floating rate?

A floating rate of interest on home loans is less costly than a fixed rate of interest, usually 1% to 2% lower.
If RBI reduces the repo rate, then MCLR will also decrease so the interest rates will also go down and you will benefit as your EMI will also go down.
No prepayment penalty or foreclosure charges. This means that without paying any extra fees, you can repay your home loan partially or fully before the end of the loan tenure.

What are the advantages and disadvantages of fixed and floating exchange rates?

What are the disadvantages of floating rate system?

As the Floating rate of interest depends on market lending rates, if lending rates increase the interest rate also increases and EMI will also increase. In this case, the Floating rate of interest EMI can be unpredictable.
It is not ideal for borrowers with fixed incomes and very tight budgets, as a Floating rate of interest may affect the financial planning and savings of such borrowers.
Not all borrowers or properties are allowed to avail Floating rate of home interest, as some lenders may offer only a fixed rate of interest as per their conditions.