Getting a mortgage loan is very easy these days. However, choosing the best option is always a complex matter. You must do your homework well before jumping on something. When applying for a home loan, the first thing that bothers applicants is whether they opt for a fixed or variable rate. Let’s see which option is the best.
A fixed interest rate means the repayment of mortgage loans in equal fixed installments over the term of the loan. In this case, the interest rate does not change with fluctuations in the market. At the beginning of the loan term, most monthly payments are used for interest, with the principal being paid in the later parts of the term.
The interest rate remains fixed regardless of market conditions.
A fixed-rate mortgage loan is ideal for those who can budget well and want a fixed monthly payment program that is easy to budget and doesn’t fluctuate.
It brings a feeling of security and protection.
The main disadvantage of fixed interest rates is that they are generally 1 to 2.5 percentage points higher than the floating rate home loan.
Second, if the interest rate falls for any reason, the fixed-rate mortgage will not benefit from the reduced interest rates, and the borrower will have to pay the same amount each time.
Another problem is whether the fixed-rate mortgage loan is fixed for the full term or only for a few years. This should be verified when applying for a mortgage loan from the bank.
A fixed mortgage loan that can be changed every few years will surely eliminate the spirit of that loan.
Experts agree that fixed rates are a better option if the economic scenario promises a rate increase in the near future.
The variable interest rate implies that the interest rate varies according to market conditions. Variable interest rate mortgage loans are tied to a base rate plus a variable item. So if the base rate varies, the variable rate will also vary.
The main advantage of variable rate mortgage loans is that they are cheaper than fixed rates. So if you get a variable rate of 11.5% while the fixed loan is offered at 14%, you will still save money if the variable rate increases to 2.5 percentage points. Percentage.
Even if the variable interest rate exceeds the fixed interest rate, this applies to a certain period of the loan and not to the entire term. Interest rates will certainly drop over a long period of time, and therefore the variable interest rate brings a lot of savings.
The downside to variable interest rates is the inequality of monthly payments. This makes it difficult to budget with variable rate mortgage loans. As we’ve seen recently, borrowers have had to pay additional thousands of dollars a month for their EMIs due to rising interest rates on floating home loans, which have depleted their entire budget from the disruption.
Let’s understand it with an example. Suppose you have obtained a loan of Rs 25 lakh for 20 years.
The variable interest rate is 9.75%
The fixed interest rate is 10.5%.
If you opt for the variable rate, the EWI is Rs 23,712, while the EMI under the fixed rate option is Rs 26,660. So if you choose the variable rate, you will end up saving around Rs 2,948 each month. Although this amount seems small, it will make a big difference in the long run.
However, you will benefit if you only opt for a variable rate mortgage as long as the rate does not exceed 11.5%.
When choosing the interest rate, most mortgage borrowers choose variable interest rates.
After all, it is up to the borrower to decide what is best for them. Before making a decision, the borrower is advised to compare the mortgage loans of different institutions in detail, including the various specified parameters. When security is paramount, a fixed rate home loan is the best. However, this will not come without the premium on interest rates.