The home finance institutions in India have come with several innovative products to woo the home buyer. There are different types of interest rates available in the market for home loans currently of which the most common variants are the fixed interest rate, the floating interest rate and the adjustable interest rate which is also known as the hybrid home loan.
The Fixed Interest Home Loan
These loans have a fixed interest rate throughout the period of repayment. However practically the fixed interest rate home loans do not have any guarantee of remaining fixed throughout the tenure of repayment. The banks can increase the interest rates after a certain period as dictated by the Reserve Bank of India. However the rate shall remain fixed for a defined period despite changes in the market lending conditions for a predetermined period before the bank can alter it. The advantage in this type on loans is that despite increase in the market lending rates the interest rate shall remain as determined at the time of taking the loan. But conversely if the interest rates outside fall the benefits will not be passed on to the customers in this case.
The Floating Interest rate Home Loans
As the name suggests these loans have interest rates that vary as per prevailing conditions. The rate of interest that is applicable at any point of time during the repayment tenure depends on the index rate/Reference Rate (Base rate or BPLR). These rates are determined by the Reserve Bank of India which fixes the repo rate and the reverse repo rate. Thus in case the RBI decides to reduce liquidity in the market and increases the index rate there will be a consequent increase in the interest rate of the home loan. The opposite will happen when the index rates are lowered by RBI and the customer will have to pay a lower interest rate for the same home loan. However the customer must check the credentials of the bank in terms of actually lowering interest rates whenever the index rates are lowered and letting the customer avail the benefits.
The Adjustable (Hybrid) Interest Rate Home Loans:
This type of a home loan combines the best features of the fixed and floating interest rate loans to provide the customer with a greater degree of freedom while availing a home loan. In such cases the initial period of repayment has a floating interest rate with the option for the customer to choose a fixed or floating rate at a later stage. Earlier there were several restrictions on such loans from the RBI which have been eased subsequently. These loans as also referred to as teaser loans in certain conditions.
Making the Choice
With so many options available the customer at times is at a loss of ideas about which type to select. The overwhelming majority of home loans disbursed in the past few years have been of the floating interest rate types though there has been a significant change in this trend recently. Predictions of the interest movements in near future are a good guideline when making the decision which can be further substantiated through a detailed calculation of the actual amount that will have to be repaid in each type over the complete tenure of the loan.