As of June 2019, total credit circulating in home loans stood at Rs.11.8 crore from different financial institutions across India. This includes all types of loans that can be availed for expenditures related to a home. Consequently, it is essential for potential borrowers to understand their different types and choose the right scheme to suit their needs.
Selecting the best type of home loan depends on two things –
- The purpose for which it is being availed.
- The interest rate offered.
Understanding the different types of interest rates is crucial to make the best choice while deciding to opt for financing options.
Fixed-Rate Home Loans
This type of interest rate is not subject to market conditions or regulations from the Reserve Bank of India. Irrespective of the MCLR or repo rate that is offered by RBI, borrowers of home loans with fixed rates of interest have to pay the same EMI amount every month. This is simply because the interest rate applicable to their home loan does not change with rate cuts or increments by RBI.
Typically, this type of interest rate calculation is safer for borrowers. The primary advantage of fixed rates is that borrowers know the exact home loan EMI they have to pay.
Consequently, it is easier to plan their finances. Any borrower considering to finance the purchase or construction of their house with a fixed interest loan should keep a watch and apply when the financial market is at a low.
Floating Rate Home Loans
The rate of interest offered under floating rates fluctuates according to the rise and fall of the financial market. It is directly connected to the RBI rate increments and cuts. Subsequently, the EMI amount that borrowers pay while repaying their housing loan also changes over the tenor. While in case of fixed rates, borrowers can plan their financials ahead with a housing loan EMI calculator; in case of floating rates that is not possible.
For both MCLR and repo rates, floating rates of interest fluctuate according to the condition of the financial market. As a result, it completely depends on the market and RBI guidelines if an EMI amount will go up or down. While considering how to choose between floating and fixed interest rates, borrowers should be considering the floating rates when the market is inflated.
Housing loans are high-value credit options, which have lengthy tenors going up to 20 years. As the market stabilizes, a borrower can expect better rates of interest in case of floating rates.
Distinction Based on the Purpose
While the financial scheme is essentially the same, the purpose to borrow a home loan decides a few factors which also include the disbursal.
These purpose based differences are discussed below –
- Home Purchase: After verification and approval, financial institutions usually disburse the loan amount directly to the seller. Typically, lenders offer a slightly lower rate of interest on these loans.
- Home Construction: In the case of construction, the loan amount is disbursed to the borrower for use according to his or her own discretion. Additionally, the loan amount is disbursed in multiple payments as construction
Potential borrowers can easily decide on their home loan type based on purpose, though they must regularly check the market conditions while selecting their type of interest. After deciding on the loan product, the application procedure is fairly easy.
It is advisable for borrowers to check the home loan eligibility and document requirements ahead, and prepare accordingly. This can effectively save time while applying for the loan.
Additionally, it is also imperative for borrowers to look up everything they need to know about saving taxes when taking a home loan. This can save significantly in taxes.