Thursday, 18 August 2016

Get Benefits from Fixed rate Home Loans

Purchasing a house is probably the biggest financial decision people take in their lives.  No doubt it requires a lot of time and research to zero down on a choice. Once this is done comes the next complex aspect of deciding on the kind of home loan to go for. A home loan is a long term liability that will impact you for 20 to 30 years. It requires careful planning and budgeting so that you are able to honour your loan commitments without any financial stress. There are two options that banks offer. Fixed rate and floating rate. As the name suggests, in the fixed rate option a pre-specified bank interest rate is charged throughout the loan tenure. In the early part of the loan a majority of EMI amount is used to service the interest and principal is served in the later part of the tenure. In case of floating rate the bank interest rate is tied to a reference rate which changes with the economic environment of the country. As bank interest rate is the most important aspect of the house loan it is a tough decision to choose between the two. Each option has its own pros and cons and you should choose one that suits your requirements.
Here is how you can benefit from a fixed rate house loan.
Fixed instalments
You pay a fixed amount of EMI every month throughout the tenure of the loan no matter what the market condition is. This fixed repayment schedule brings a sense of clarity that helps you in budgeting well. People who have doubts about whether they will be able to afford the monthly payment if there is a steep rise in the interest rate should definitely opt for the safer option of fixed rate house loan. It gives you peace of mind as you need not keep a watch on where the interest rates are heading. While floating home loan interest rate would change with market dynamics and disturb your finances.
Read the loan agreement carefully and check whether the fixed rate is fixed only for a specific period or for the entire tenure of the loan. If it is fixed for only a certain period say 5 years, then you will enjoy a constant EMI only for that period. From the 6th year onwards it will automatically convert to a floating rate, where EMIs will fluctuate based on the prevailing bank interest rates. 
A shield from market fluctuations 
Fixed rates shield you from the interest rate fluctuations due to changes in the economic environment. If interest rates are relatively low at the time of taking the house loan and you are expecting an increase in the future, taking a fixed rate home loan is beneficial as you can lock in your loan at that rate. Even if interest rates climb to higher levels you have nothing to worry about.
A disadvantage with fixed interest rate is that it is usually 1-2% higher than the floating interest rate.  Also if the bank interest rate drops in the future you will not get any benefit of these reduced rates as you have to pay a fixed amount every time. 
The decision to choose between fixed and floating rate depends upon various economic factors. Fixed rates are a good option if the interest rates are low and economic conditions indicate a rise in the interest rate in future. If rates are high currently and likely to come down, it is best to go for floating bank interest rate as it opens the possibility of lower payments in the future when rates drop.
You should also factor in your risk taking ability while making a choice. If you want stability in the instalment amount every month fixed rate house loan is a good option. If you are ready to take the risk of fluctuating EMI amount to make sure you get the benefit of lower rates in future you can go for floating rates.
If you are opting for a shorter duration house loan or planning to prepay it within 5-7 years, then you may not go for the higher fixed rate. That’s because for shorter durations the interest outflows are less and fluctuations in the interest rate will not have much effect on the loan as a whole.
If the current interest rates seem low, if certainty and security play a prominent role in your financial life, if you are taking the loan for a long period of time then fixed rate house loan is a good solution. 

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