Choosing the right home loan is as important as picking up the right property
For property buyers looking for home loans, the current scenario is not really comforting. Not only have interest rates gone up by 2-3 per cent in the last 12-18 months, even banks have tightened their lending norms.
In such a scenario, property buyers need to be more knowledgeable about their home loans than in the past and with interest rates on the uptrend, the debate between fixed and floating rate option has become more crucial than earlier. For instance, floating rate would be a natural choice when interest rates are on the downward trend or when they are static. On the other hand, fixed rate would be an automatic option when the rates are on the rise. But the task gets even more challenging because nobody can get a fix on the interest rate movement. But our task is to make matters easy for you and when you shop for your property, there should be little dilemma on the loan option.
Fixed or floating?
In the current interest rate scenario, you may be tempted to believe that fixed is the best option. However, remember that even in a fixed loan option, the interest rate is not fixed forever. Most fixed loans carry a clause which allows the banker to increase the interest rate in the event of steep hike in interest rates. As a result, most of the home loan rates are linked to the primary lending rate. However, borrowers often tend to ignore this fact as they are invariably in small print. Fixed loans would be best suited when the loan period is for a longer period, ranging from 15-20 years. Also, keep in mind the fact that fixed loans generally carry a higher interest rate than a floating rate.
Floating rate on the other hand, is ideal for those looking for a short tenure loans. Ideally, go for this option if your loan is for less than 10 years. The biggest advantage is the interest rate is lower on floating rate loans and most banks don't charge penalty in the event of pre-closure of loans. A floating rate works to a great advantage for short term loans with five year tenure because even in the event of a rate hike, it would not be expensive. Though home loan rates have gone up in recent times, banks have tended to keep this hike to the minimum at one go. Since the difference between a floating rate and fixed rate has generally been 0.75-1 per cent, you don't lose much if the loan tenure is for five years.
A flexi loan product is an ideal solution for someone who cannot take a call on interest rate.
Many banks offer this product which is a combination of fixed and floating option which allows the borrower to switch from one option to another, limited number of times.
Even those looking for a home loan with tenure of 10 years can look at this option as it offers flexibility.
But read carefully the fineprint relating to the number of switches because it is very crucial in a flexi plan. Also, check out whether you can do the switch free of cost.