In your best interests: How to get the best out of your interest rates

Buying a home involves spending a considerable amount of time researching, finding a suitable property, doing background checks and finding a home loan which is best suited to you. But how do you ensure that the home loan would not prove to be too expensive for you? Comparing home loans from different lenders is not enough. Interest rates depend on various factors such as the availability of money in the market, inflation and the monetary policies in place at that time. Opting for a floating rate would mean that your loan instalments will keep changing with fluctuations in the interest rates.

A fixed interest rate would mean that you might pay more for your instalments even if the market is flush with liquidity and funding is cheap. To get the best out of your interest rate and keep the total outgo at the minimum, you must choose whether you should take a fixed interest rate or a floating interest rate. Interest rate is linked to the lenders base rate which is decided by the banks based on the RBI guidelines. While many banks offer a fixed rate (usually 0.5%-1.5% higher than floating rates) these rates are available only for a short duration. After this duration, banks switch to the prevailing market rate. Fixed rates offer a greater degree of security from the fluctuations of the market, but floating rates offer flexibility and often would mean that you would pay lesser than you would if you were on a fixed interest rate. Choosing between a fixed or a floating rate depends on their differences, various economic factors and outlook. Knowing the difference between a fixed and floating rate of interest can be easily found out by taking a look at the rate of interest presently.

If the rate of interest is high and it is apparent that it will drop, opting for a floating rate would be the best choice. Similarly, if the rates are low, going with a fixed rate of interest would mean that you would save more in terms of EMI. Fixed rates also help to manage a steady flow of cash but need to be low enough so that you will be able to sustain the EMI’s during the long term repayment. Thus, choosing your type of interest is the best way to save money on interest rates. Thinking carefully and gauging the market will help you get a good understanding of the future trends which might affect your repayment.

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