A housing loan is a secured loan borrowed for purchasing a property or constructing a house. Home buyers apply for a home loan to lower their financial burden. In most cases, the purchased property acts as housing loan collateral. The banks and other financial institutions use either of two interest rate methods – fixed and floating to determine the cost of the loan and Equated Monthly Instalment (EMI). However, most applicants prefer fixed home loan interest rates even if it costs higher.
What is Fixed Home Loan Interest Rate?
Fixed-rate home loans have the same interest rate during the entire tenure of the loan. As a result, it ensures that borrowers only have to pay fixed equal instalments as home loan repayment. These EMIs are not affected by market fluctuations. In most cases, EMIs paid during the initial stages of loan tenure are used for paying interest, while payments made at the later stages address the principal repayment. The interest rate for a fixed home loan is stable but comparatively higher than a floating home loan. This situation can reverse if the economy’s floating rate determinant is higher.
How to Calculate Interest Rate on Fixed Home Loan?
Home loans are indeed long-term loans; therefore, calculating the interest liability for them in the first place is of utmost importance. It is calculated using any of the two methods listed below:
- EMI Calculator: The home loan EMI calculator is the simplest method to calculate EMI. These are the inbuilt applications with some predefined fields that include
- Home loan amount
- Rate of interest
- Loan Repayment tenure
After feeding these details into the system and clicking the “Calculate” button, the interest payable gets calculated.
- EMI Calculation Formula: Alternatively EMI on a fixed home loan can also be calculated using EMI = [P x r x (1+r)^n]/[(1+r)^n-1] where P = Principal , r = rate of interest , n = number of instalments.
Interest Rate Slabs on Fixed Home Loan
The fixed home loan has varying interest slabs depending on an applicant’s income potential and credit score. Alongside, these interest rates vary for each bank too. Generally, the interest rate for fixed home loans is 1- 1.5% higher than the floating rates. Presently, the range of a fixed home loan varies between 7% to 12% per annum. Banks also charge a processing fee between 0.5% to 1% depending on the loan amount.
Banks and financial institutions charge fixed interest rates differently from self-employed and salaried persons. A fixed home loan interest rate is higher for self-employed persons, i.e. 8.05 % – 8.60% or beyond for each bank. On the other hand, the same interest rate for a salaried person is approximately 7.99% to 8.50%. Alternatively, if the person opts for a home loan balance transfer, the interest rate charged by the bank in such a case is 8% approximately.
Pros and Cons of Fixed Home Loan Interest Rate
The fixed home loan is becoming the most sorted choice for people who wish to have a planned structure for their EMIs. Since every coin has two sides, the same is true with Fixed home loans.
Advantages of Fixed Home Loan
- The loan repayment is constant for a fixed home loan. Thus, people can be certain about their payment liabilities.
- A borrower remains unaffected by market fluctuations and varying interest rates.
- It also helps people to plan their finances better.
Disadvantages of Fixed Home Loan
- Fixed home loans have higher repayment amounts due to higher interest rates.
- In this case, applicants do not enjoy the benefit of the lower interest rate prevailing in the market.
Who Opts for Fixed Home Loan?
While planning home loans, people consider various factors to decide whether to go with fixed or floating interest rates. However, people who opt for fixed home loans have the following things on their minds.
- They do not wish to encounter any volatility in the interest rates.
- They believe in planning their financing well in advance.
- They are generally conservative investors/borrowers.
- They are salaried personnel with a fixed income source.
Fixed home loans are always at the rescue for people lacking funds to buy or construct a property. The basic idea of the fixed interest rate is to provide stable support to people. Furthermore, a fixed home loan keeps people relaxed as they can only focus on paying pre-decided instalments.
Suman(Kul Prasad) Pandit is a graduate from Tribhuvan University with four-year experience in corporate and start-up sectors in UK and USA. Being a responsible & sustainable business enthusiast he is dedicated to business education to solve problems in entrepreneurship and business growth.