A home loan is most often a large, long-term loan. The repayment of a home loan usually runs over a long duration – of at least 10 years and more. It can even be over 15 years in many cases, RBI is also planning to extend it to 30 years. Therefore, it is very important to choose the right home loan scheme, and plan for the various aspects that come along with it. Home loan schemes are classified based on interest rates and repayment tenure. Here we talk about schemes based on interest rates:
Fixed interest rate:
Usually, these schemes are not generally feasible because most banks fix these rates significantly higher than the prevailing rate. Moreover, most banks have stopped offering these schemes.
Floating interest rate:
Borrowers who have the eligibility in easy liquidity of finances can go ahead with this scheme. The floating rates are decided based on the market conditions, and are linked to the banks internal benchmark rate. These benchmark rates changes based on market conditions or the Reserve Bank of India’s monetary policy changes. If the benchmark rate goes up, the interest rates on loan schemes also go up and vice versa.
Schemes that involve features of both fixed and floating rates are called hybrid schemes. There are two broad variants of this scheme. The first variant is scheme that offers a fixed interest rate for the initial few years and later follow the floating interest rate scheme prevailing then. The second variant offers a part of the loan under the fixed rate scheme and the remaining part under the floating rate scheme.
Borrowers who can start paying EMIs immediately can opt for the schemes that offer fixed-rate loans during the initial years of debt.