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Loan on Property: Which is Better?– Fixed or Floating Rate of Interest

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One of the most expensive purchases a person ever makes is a home. Some people may have money, while others may require financial assistance. Financial institutions and NBFCs provide a loan on property for purchasing a home to address such a problem. Numerous lenders offer mortgage loans.

When you take out a home loan, you must make several choices. What should the tenure be, who should be the lender and more? The type of home loan interest rate is one thing that we frequently need to keep in mind. Choosing between fixed and floating interest rates is vital since it impacts the finances.

Financial institutions offer loans against property. A loan against property is a secured loan approved against an asset pledged as security. This asset may be privately owned land, a home, or other business property. The asset continues to be held as collateral by the lender until the total amount of the loan against the property is repaid.

The loan against property interest rate varies from lender to lender. The rate and type of interest imposed throughout the loan’s whole repayment period (tenure) differ from one lender to another.

Types of Home Loan Interest Rates

Fixed Interest Rate: In this case, the interest rate is fixed for the duration of the loan or, if shorter, for a set period of time (say, five to ten years), depending on the bank’s rules. Your monthly payments can be readily anticipated if you choose a fixed home loan interest rate. You can also schedule your payments accordingly.

Floating Interest Rate: In this case, the bank periodically changes the interest rate. This interest rate may change if the Reserve Bank of India’s (RBI) financial policies or those of the banks alter. When you choose a floating interest rate, it becomes challenging to estimate your EMIs accurately.

Which Is Better: Fixed or Floating Interest Rates?

In the event of a fixed rate, as the name suggests, the interest rate is set for the duration of the loan on the property or for a certain period of time and never changes. This provides financial protection for the buyer from interest rate changes. The buyer is no longer entitled to the benefits of lower interest rates in the event that the bank’s interest rates decrease. However, the buyer is not required to pay the higher rates if the rates increase.

Under a floating rate, the buyer is still responsible for paying the interest rates, which may occasionally change. The buyer gains from rate reductions and bears the burden of any rate increases. More than once a year may see a revision to floating rates.

The loan-against-property interest rate charged is a significant deterrent to taking out house loans with fixed rates. Floating interest rates are significantly lower than fixed interest rates. The cost of borrowing varies from borrower to borrower and from lender to lender. Interest rates rely on several parameters, including credit score, employment status, pay structure, etc.

Fixed Vs. Floating Interest Rate: Things to Consider

  • Prepayment fees: Most lenders impose a fee for early home loan repayment. These fees typically account for 2% to 3% of the total payment. With regard to home loans with floating interest rates, there are no prepayment penalties. Taxes, when applicable, are added to prepayment charges. Pre-Closure fees are subject to an 18% Goods and Service Tax (GST).
  • Conversion fees: To convert a fixed-interest house loan into a floating-interest, lenders charge a conversion fee of 2–3% of the outstanding principal amount. There are typically no fees to convert a floating interest rate loan to a fixed rate loan. From 2022 on, conversion charges are subject to an 18% GST.
  • For home loans taken out at a fixed interest rate, several institutions have relaxed the eligibility requirements for applicants. Applicants with low CIBIL scores usually can only qualify for fixed-interest home loans.

Verdict on Fixed vs. Floating Interest Rates

As a result, choosing a floating-rate house loan makes sense because they are less expensive than fixed-rate loans. However, many Indian lenders no longer provide home loans with fixed interest rates.

However, switching from fixed to floating interest rates is advantageous for long-term house loan borrowers who have previously taken out loans with fixed interest rates. However, this method is only workable if the applicant has the conversion fees ready to be paid beforehand and the current interest rate is about 2-3% higher than the current floating interest rate.

Conclusion

One important thing you should consider before applying for a loan on the property is the type of interest rate. One should be aware of the risks associated EMIs, budget planning, and fixed vs. floating interest rates, among other things. Also, note that the loan against property interest rate varies from lender to lender. Hence, evaluate properly and then make a decision since it will affect your finances.

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