Major banks and financial institutes such as Bajaj Finserv offer home loans in India. In such loans, the borrower is required to repay the home loan in fixed equal installments, throughout the tenor of the loan. Fixed rate home loans are not affected by market fluctuations, which means their interest rate does not change even when market conditions do. Mostly, the borrower pays the interest part in the monthly payments at the initial stages of the home loan repayment, while at the later stages, the borrower services the principal.
a) The major benefit of taking a fixed rate home loan is the rate of interest does not change, even when the market fluctuates.
b) The fixed monthly repayment schedule, which does not fluctuate, is easy to budget for, and therefore, fixed-rate home loans assist the borrower in long-term planning.
c) The borrower is assured there are no risks in the future, as the fixed rate ensures financial security.
With fixed interest rates during the entire home loan tenure, the rate does not fluctuate despite market changes, unlike floating rate home loans that change with the market conditions. Banks/NBFCs that offer home loans on floating interest, attach them to a base rate and a floating element as well. Therefore, the floating interest rate varies with any change in the base rate. However, a floating rate home loan works out cheaper than when the interest rates are fixed. In a fixed rate loan, although the interest rate remains unchanged, the rate itself is higher than that of the floating rate home loan.
Floating home loan interest rates in India actually do not vary consistently. Although according to RBI instructions, banks are required to bring down the rates for all customers, the banks lower the prevailing interest rates only for the new customers, and later change them to match the financial market. Which means older customers continue to pay the same interest rate the banks set for them during the initial stages, and cannot enjoy the privileges of the lower interest rates that the banks extend to their newer customers. If the interest rate reduces, the banks keep the EMI for a floating rate home loan unchanged, while altering the tenor of the loan. Banks place reset clauses, riders, and other terms and conditions for fixed rate home loans and these can affect the interest rate as and when the market fluctuates, although the reset clause is subject to revision. Therefore, the bank can revoke the fixed interest rate with a sharp hike in the rate or after a fixed period, as the nature of the clause depends on the regulations of the bank.
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