Know Why It Is a Better Option to Choose Floating Interest Rates on Home Loans
The housing loan interest rate depends on the Marginal Cost of fund based Lending Rate, also known as MCLR. The MCLR further depends on the repo rate which is regulated by the RBI. In the current review (financial year 2019-2020), the RBI has reduced the repo rate by 35 basis points to 5.40%. This reduction in the benchmark also lowers the MCLR for financial companies, thus bringing down the interest rate and making the cost of advances more affordable for the borrowers.
While you avail home loans in India, you need to choose between two types of interest rates – fixed interest rate and floating interest rate. Fixed rates remain unchanged irrespective of the change in the MCLR or repo rate. The interest rate availed at a floating or variable rate changes as and when the MCLR differs.
Given below are some of the benefits of a fixed and floating interest rate.
Benefits of Fixed Interest Rate Home Loans
As the interest rate remains unchanged throughout your tenure, your EMIs do not differ. You can use a loan EMI calculator to easily determine your equated monthly instalments in advance and plan your repayments well throughout the tenure. Knowing your EMIs in advance will also help you avoid payment defaults.
Benefits of Floating Interest Rate Home Loans
Housing loan floating interest rates are comparatively lower. In case you choose to prepay your loan, you do not have to pay any additional charges. Besides, if there is a reduction in the MCLR, the interest rates will also decrease simultaneously.
Fixed Interest Rate vs. Floating Interest Rate - Which Is Better for You?
To choose between floating and fixed interest rates, consider the comparison given below.
1. Floating interest rates change with the difference in MCLR. This ensures that your interest rate will also drop in case there is a drop in the MCLR, lowering your EMIs and making the cost of your loan affordable. Fixed interest rates do not change with fluctuations in the MCLR, and thus you cannot enjoy lower interest rate in case MCLR reduces.
2. Floating interest rates are 1.5% to 2% higher than fixed interest rates.
3. Advances availed at a floating interest rate does not bear any GST rates, thus making your loan inexpensive.
Such housing advances also offer you with home loan interest tax benefits under Section 80C and 24(b) of the Income tax Act. As per the mentioned section you can claim deductions of up to 2 Lakh for the amount payable towards the interest of your loan.
Other tax exemptions and benefits home loan borrowers should know about are –
- Section 80C of the Income Tax Act that offers deductions of up to 1.5 Lakh against the amount paid towards the principal amount.
- Section 80EEA allows you to claim deductions against the amount paid as stamp duty.
Various financial companies offer such home loans at both floating and fixed interest rate.
There are several lenders who provide attractive home loan rates in India and minimal documents along with a prolonged tenure, substantial loan amount, online account access, balance transfer facility, top-up loans, etc.
Additionally, choosing the perfect type of interest rates on home loans depends on your financial stability and risk appetite. While a fixed interest rate is safe as they do not depend on the fluctuations of the market value, but they are 1.5% to 2% higher than floating interest rates which increase the total cost of your loan.
If you hold appropriate knowledge on the market variables and have the required risk appetite you can optimally choose between floating and fixed interest rates as per your financial planning.