Understanding the Different Types of Interest Rates on Home Loans

Unlike earlier, applying for and obtaining a home loan is relatively easier today to purchase your dream home. To push home loan sales further, financial institutions are offering prospective buyers attractive interest rate options on home loans.

While speedy home loans are welcomed by eligible persons, one needs to apply some thought to the type of interest rates that are suitable for each borrower. This sometimes leaves people confused about what loan offer is best for them in the long run.

To resolve this dilemma, you first need to gain a proper understanding of the two basic types of home loan interest rates - fixed and floating.

Pros and Cons of Fixed Interest Rates

In fixed interest rates, you will pay a fixed amount each month as EMIs (equated monthly instalments) during the entire home loan tenure. In essence, the number of instalments will remain the same over the predetermined period. Typically, this may vary anywhere from 15 to 30 years, depending on your age, repayment capacity and other parameters as well as the lender in question.

A fixed interest rate regime has some advantages. As market fluctuations don’t impact the rates, they remain constant over your repayment tenure. Since the rates are predictable, fixed interest rates are considered more secure.

On the other hand, there are a couple of disadvantages too. Unlike floating interest rates, fixed rates are generally higher by 1% to 2.5% for home loans. Since the rates remain constant, even if interest rates fall, you will continue paying the higher interest rate. Over the tenure, this differential interest rate amount can work out to a sizeable sum.

It’s important to know the terms in the fine print, however, as the term ‘fixed’ is somewhat misleading. Aware that economic conditions may necessitate a change in the interest rate, some lenders insert a fine print clause that the rates may be raised at some point due to adverse conditions. In other words, even a fixed rate may fluctuate if the market situation so demands. If this clause is not mentioned in your home loan agreement, the rate could be fixed for the entire tenure.

Nonetheless, as different entities deploy differing terms, you should confirm with your lender whether the fixed rate is only for the first few years or will continue throughout the loan duration. For those unwilling to take risks, the fixed-rate tenure is the safest avenue.

Upside and Downside of Floating Rates

Depending on market conditions, floating interest rates could rise or fall. Such interest rates are linked to a base rate provided by various lenders together with the floating element. As a result, if the base rate changes periodically, so will the floating rates. But fluctuations in floating rates tend to be short term because of their susceptibility to market conditions.

In recent years, floating rates are becoming popular with homebuyers as interest rates have dropped. There are other advantages too such as floating rates being around 1% to 2.5% lower than fixed rates. In benign market conditions, the interest rates could drop even further.

Conversely, during market fluctuations, the rates may rise, even going higher than the fixed rates. Of course, these higher rates may only hold in the short run. But for people with fixed budgets, a rise in the floating interest rates could upset their calculations. Therefore, you must be prepared for the unpredictability of floating interest rates and willing to take short-term risks of paying higher home loan EMIs.

Overall, by the end of your loan tenure, the floating rates could still end up saving you some money. Lenders also prefer you opt for the floating rate because they have the option of increasing rates as per the economic cycle. With fixed interest rates, lenders could be saddled with a contracted rate that is lower even when the rates are rising.

Of course, there is a possibility that despite opting for a floating rate, the rates may witness an upcycle. You will then need to pay interest on par or higher than the fixed rate. In such scenarios, borrowers can shift to the fixed rate by paying the applicable switchover charges. But if the home loan amount is not too high or at the end of its tenure, there is no point in switching.

Meanwhile, if aspiring homebuyers have been unable to avail of home loans from traditional lenders, fintech players such as Clix Capital can be conveniently approached for such loans. Clix offers easy home loans of up to INR2 crore with tenures as high as 25 years. The interest rate regimes offered are floating and dual interest rates. In the dual rates, the interest is fixed for the first few years and then followed by floating rates. What’s more, Clix follows simplified documentation procedures.

Clix Capital also offers home improvement loans to renovate your home or top-up loans if you need extra funds to purchase a home. Loans are also available for purchasing a plot and self-construction.

About Clix Capital

Clix Capital is a new age NBFC revolutionizing the lending space by offering differentiated digital lending products that are driven by technology and deep analytics. It offers a range of lending products to a varied spectrum of customers across the MSME and consumer segment, including personal loans, MSME loans, healthcare loans, and mortgage finance.

Clix is co-founded by industry veterans Mr. Pramod Bhasin and Mr. Anil Chawla and is backed by a private equity fund AION Capital Partners Limited (an affiliate of Apollo Global Management, LLC - one of the largest alternate investment managers globally with AUM of $433 billion). Mr. Bhasin is the founder of Genpact and the former CEO of GE Capital India and Asia; and Mr. Chawla has been the former CEO of GE Capital India and Asia’s Commercial Finance Business.

Together Mr. Bhasin, Mr. Chawla and AION jointly acquired the commercial lending and leasing business of GE Capital India in September 2016 and rechristened it Clix Capital.

For more information, please visit www.clix.capital.