The real estate market is witnessing a slowdown. This is partly due to rising prices and also due to increase in the home loan interest rates. Whether we choose a fixed or variable interest rate for repaying the home loan to the financial institution that has to be examined thoroughly?
For a home loan with a fixed interest rate one should know his/her monthly repayments for the entire duration of the loan. This is slightly more expensive than a floating rate but there is no risk associated with it. Yet this formula is still the most popular.
A variable rate may vary throughout the duration of loan repayment. In the start home loan may be less expensive but may become more expensive later because everything then depends on the interest rate that changes due to the government policies. There is a built-in protection. The maximum possible exceptions for the variable interest rates are predefined so there are not too big surprises can come for the home loan repayment. With a "tunnel" 2 / -2 is the rate at the review dates no more than 2 percentage points higher in comparison with the start of the loan. Conversely, the falls no lower than 2 percentage points. For example, an interest rate of 5% can be determined with these limits do not increase in excess of 7% for interest and it performs well over the whole duration of the loan.
Besides the fixed and variable home loan interest rate accordion credit is an also a point. In this formula the term is not fixed in advance at the review date, it is adjusted depending on the evolution of interest rates. For example, during rising interest rates your monthly payment remains the same but the duration is extended. Again, there are safeguards built in, making the time limit not too prolong in these cases but renewable upto 5 years only.
Choose which formula is best?
Depending on one's own salary expectations or if you believe that interest rates will continue to drop, choose the formula that best suits you. Also, you can often change at the time of formulation of a repricing. You can also choose to formula 10/5/5. Then you are 10 years guaranteed a fixed interest rate, which is then reviewed and the formula is reworked again for 5 years and so on.
The author is a home loan analyst and is in the field for more than 10 years analyzing various aspects of home loan interest rates in India
and the amount of loan that can be sanctioned on a particular property.