Jun 08, 2023

Fixed Interest Rate for Home Loans: Beginner’s Guide

by Godrej Properties Limited

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Nothing can replace the joy of buying a new house. However, buying a home is one of the most crucial financial decisions in an individual’s life that requires thorough consideration. An investment so significant needs planning on multiple aspects, such as the type of property, location, and, lastly, the financial capacity of a homebuyer. So often, buying a home involves taking a home loan. Primarily people consider a home loan due to insufficiency of funds which is quite common when such a huge amount of sum is involved.

These days several financial institutions are offering home loans at quite affordable interest rates, but then again, it is up to the homebuyer to choose the type of home loan. Many first-time home buyers are not versed in different kinds of interest rates on home loans, such as fixed rate interest, one of the most popular types of interest rates on home loans. Let’s understand everything about fixed interest rates on home loans, but for that, let’s have a brief about interest rates on home loans.

Overview of Home Loan Interest

Taking a home loan has almost become a norm when buying a home for most people. However, it is essential for the home buyers to know that on a monthly basis, the lender charges a percentage of the outstanding balance of the loan amount with the EMI, which comprises the interest and the principal amount to be repaid.

To suit the diverse needs and preferences of home buyers, there’s a provision for choosing different types of home loan interest rates, such as fixed rate of interest and floating rate interest. And as mentioned earlier, fixed interest rates have gained popularity amongst home buyers.

Let us understand the correct definition of fixed interest rate, the benefits of having a fixed interest rate on a home loan, etc.

What Is The Meaning Of A Fixed Interest Rate On A Home Loan?

Let us first understand the meaning of fixed interest rates.

A fixed interest rate on a home loan is a type of interest where the interest rate remains the same throughout the term of the home loan. This particularly implies that the interest amount on the loan does not fluctuate as per the market conditions.

Even though the amount of interest charged is higher than the principal amount, the fixed rate of interest allows the homebuyer to calculate their monthly EMIs for the complete loan tenure. Owing to the stability quotient, financial planning becomes easier for the homebuyer.

How does Fixed Interest rate work?

Ideal for risk-averse investors, a fixed interest rate on a home loan is added to the principal amount. The EMIs comprise both the interest amount and a percentage of the principal amount. When you take a home loan with a fixed interest rate, the lender calculates the monthly payment based on the loan amount, the interest rate, and the loan term. This monthly payment (EMI) will remain the same for the entire term of the loan, regardless of any changes in market conditions or economic fluctuations, allowing the homebuyers to better plan their finances.

How To Calculate Fixed Interest Rates?

Now that we know what a fixed interest rate is and how it works, let us understand how to calculate a fixed rate of interest on your home loan. Calculating fixed interest rates is quite simple; all you need to know is the home loan amount you require, the prevailing interest rate or the interest rate offered by the lender, the number of EMIs, and the loan tenure.

Let's say you borrow INR 400,000 for a 10-year loan at an annual interest rate of 9%.

Loan Amount: INR 400,000

Loan Term: 10 years (120 months)

Total Interest Paid: INR 400,000 * 0.09 * 10 = INR 360,000

To calculate the fixed monthly payment:

Total Loan Amount: INR 400,000 + INR 360,000 = INR 760,000

Monthly Payment: INR 760,000 / 120 = INR 6,333.33 (approx.)

Now, to calculate the fixed interest rate:

Interest Rate: Use financial formulas or online calculators with the loan amount, total interest paid, and loan term to find the fixed interest rate. In this example, the fixed interest rate would be 9%.

So, for a loan of INR 400,000 with a 10-year term and a 9% fixed interest rate, the monthly payment would be approximately INR 6,333.33.

For more accurate results, taking professional help from a consultant would be a wise choice.

Pros & Cons of Choosing Fixed Interest Rates

Let’s know what the benefit of having a fixed interest is on a home loan and what the disadvantages are:

Pros

  • Predictability: With a fixed interest rate, budgeting, and financial planning become easier as you know the amount of interest rate you will be paying over the life of the loan, which is an advantage of fixed-rate loans have over variable-rate loans.
  • Immune against market conditions: A reason why a fixed interest rate is always better than a variable interest rate is its immunity against fluctuating market conditions.

Cons

  • No benefit of decreasing interest rates: If the market fluctuates and the interest rates go down, fixed interest rates would not have any impact. So, in such circumstances, the interest payers would not reap any benefit from decreased interest rates and EMIs.
  • Higher repayment amounts: Fixed interest rates often start higher, which could result in higher initial payments, while lenders may offer a lower interest rate in the initial years of repayment in case of floating interest rates.

Why Should You Consider A Fixed Interest Rate?

A fixed rate of interest is an ideal choice for homebuyers who value predictability, immunity against rising rates, stability, and ease of budgeting and planning. Regardless of what your financial goals and circumstances are, a fixed rate of interest will benefit you in more than one way.

 

Frequently asked questions

1.What is the difference between fixed and floating interest rates for home loans?

Ans: A fixed interest rate is a type of interest rate that remains the same for the entire duration of a loan. On the other hand, a floating interest rate is a type of interest rate that can fluctuate based on fluctuations in market interest rates.

2.What is the risk in a fixed-rate home loan?

Ans: There are no major risks in choosing a fixed interest rate on a home loan. However, you may miss out on the benefit of lower interest rates in case of market fluctuations.

3.What is the meaning of fixed interest rate?

Ans: The meaning of fixed interest rate is that the borrower is liable to pay the same interest rate for the entire tenure of a loan.

4.Is a fixed-interest rate home loan a good option?

Ans: A fixed rate of interest is a good option for homebuyers/borrowers who seek stability, ease of budgeting and planning, predictability factor, and protection against rising interest rates.

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