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How to Avoid Home Loan Flat Interest Rate Trap?

Highlights

  • Floating vs Fixed Rate - Which is the right choice for home loans?
  • Floating rates can result in lesser interest liability compared to fixed rate home loans

Owning a home has become easier these days with so many banks and housing finance companies (HFCs) offering loans to buy you a home. Lesser processing fee, impressive loan amount and flexible repayment options are the hallmark of home loan these days. But what matters the most is the interest rate. How much interest rate does the lender charge and on what basis it charges? Usually, the lenders can charge the loan on a floating, fixed and flat basis. But when it comes to home loans, the rates are charged on the basis of floating and fixed only.

Many customers remain hesitant taking home loans on a floating basis as they fear that it would be tough for them to deal with the market fluctuations impacting the rates. And so, they choose the fixed rate option only to be in shock when they end up paying a lot more to the lender by the time the loan gets over. So, if you are servicing the home loan at fixed rate somewhere or were willing to do so, it’s time you wake up and avoid being trapped into the same. The article will tell you the perils of fixed rate trap before telling you the ways to avoid the same.

Why Should You Avoid the Trap of Fixed Rate on Home Loans?

Yes, it’s a fact that the home loan interest rate remains the same when you get the loan on a fixed basis. The principal and interest portion of the EMI remains the same throughout and so can instill confidence in you. But the rate of interest can always be a couple of percentages higher opposed to floating home loans. Now, you can get the fixed rate loan either for a full loan term or for some years. Enough of words, let’s check out the effect of floating and fixed rates on a home loan with the help of an example below.

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Example – Suresh Yadav and Pankaj Joshi are two colleagues working in an automobile company. Both Suresh and Pankaj applied for the same loan amount of ₹50 lakhs for 20 years. While Suresh was offered was the home loan at 9% (floating), Pankaj had to live with a fixed rate of 11.50%. Let’s glance at the table below showing the effect of rates on their repayment.

IndividualsOriginal Loan Amount (In ₹)Rate of Interest (In p.a.)EMI (In ₹)Interest Outgo (In ₹)Total Outgo (In ₹)
Suresh50,00,0009%4498657,96,7111,07,96,711
Pankaj50,00,00011.50%5332177,97,1561,27,97,156

The table above tells the massive difference between the interest outgo of Suresh and Pankaj, with the former likely to pay ₹20,00,445 lesser than the latter. Yes, the EMI and interest outgo of floating loan is purely indicative and can vary. But it would still be quite lower than that of a fixed rate loan.

How to Avoid Fixed Rate?

If you are yet to take a home loan, then you should ask the bank to disburse the same on a floating rate. If you are into the fixed rate regime, you can ask the bank to get it converted into a floating rate. You need to pay a conversion fee at around 2% of the outstanding balance. So, on an assumed outstanding loan balance of ₹20 lakhs, the fee would be ₹40,000. Pay the fee and start servicing the loan on a floating basis.

How Does the Floating Interest Rate Work on a Home Loan?

The floating interest rate implies that the rate of interest would change based on the prevailing market conditions. Usually, when the RBI changes the repo rate, the rate at which the central bank lends to commercial banks, you can see lenders revising the interest rates. The floating rates are also impacted based on the internal cost of banks. When the repo rate and internal cost decrease, the lending rates fall and increase the other way round. The interest rate changes would mean the changes in principal and interest portions of the Equated Monthly Installment (EMI). As the rate comes down, the interest portion of the EMI would come down. When the rate goes up, the interest portion will be deducted more, yet keeping the installment amount same in both the situations.

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Fixed & Floating Interest Rates of Home Loan Lenders

LendersFloating RateFixed Rate
State Bank of India (SBI)8.15% - 8.80%-
HDFC Limited8.25% - 9.30%9.40%-10.15%, fixed for 2 years only
ICICI Bank9.20%-9.65%
Axis Bank 8.85% - 9.50%12%
Punjab National Bank (PNB)8.50% - 8.60%8.50% - 8.60%+0.50%
LIC Housing Finance8.35% - 8.95%10.05%-10.15%

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  • Home Loan Interest Rates October 2019
    Axis Bank8.90% - 9.15%
    Bank of Baroda8.40% - 9.40%
    Citibank9.00% - 9.85%
    DHFL9.05% - 9.95%
    HDFC8.25% - 9.30%
    ICICI Bank9.20% - 9.65%
    Indiabulls Housing Finance Limited8.80% - 11.05%
    Kotak Bank8.90% - 8.75%
    LIC Housing8.35% - 8.95%
    Piramal Capital & Housing Finance9.00% - 9.10%
    PNB Housing Finance9.25% - 12.00%
    Reliance Home Finance8.75% - 14.00%
    State Bank of India/SBI8.15% - 8.80%
    Tata Capital9.20% - 9.35%