What are the pros and cons of a fixed interest rate on a mortgage loan

The Indian financial market allows a borrower to lend a certain amount of credit either at a fixed, or a floating rate of interest. Both these types come with their unique advantages and disadvantages. Borrowers must understand both and decide accordingly.

The Marginal Cost of fund based Lending Rate or MCLR is the rate under which no financial institution is allowed to offer loans. This rate is determined by the Repo Rate announced by the RBI at regular intervals. Commercial financial institutions have the freedom to determine a particular rate of interest as a spread which adds up to the MCLR and form the lending rate or the mortgage loan interest rate. The lending rate may either be fixed, where the rate stays the same over the entire loan tenure or floating, where the rate changes depending on the fluctuation in the financial market.

 

Understanding Fixed Vs Floating Rate Of Interest

A fixed-rate of interest is negotiated with the borrower at the time of submitting a loan application. A fixed-rate of interest depends on several aspects, such as the total sum availed as a mortgage loan, tenure, credit history, etc. The rate stays the same throughout the loan tenure, and a borrower pays off the debt in fixed installments throughout the repayment period.

Floating rate of interest is subject to revision every time the MCLR changes. For example, if a borrower avails a loan against property, its interest will be pegged depending on various economic factors. Any change in the Repo Rate during the loan tenure will affect the floating interest rate. 

Fixed rates are usually availed as the preferred mortgage loan interest rate. There are several advantages of this predetermined system; let’s take a look.

  • Independence from the Market – One of the primary advantages of a fixed interest rate is the freedom from market fluctuation. Borrowers can enjoy the same rate of interest even if the market rate increases during the loan tenure.

    A fixed-rate is ideal for someone who wants to plan their finances in advances. It can also help a borrower minimize chances of late repayments and defaulting.

  • Repayments over EMI’s – Fixed loan against property interest rates allow a borrower to repay the debt over an equated monthly installment. EMIs are preferred by borrowers who have a fixed schedule to repay the credit and have budgeted their finances accordingly.

  • Affordable Charges – Loan against property attracts certain fees and charges apart from interest rates. It can be beneficial for the borrowers to know the additional charges like processing fee, statement charges, pre-payment charges, etc. in advance. Otherwise, these charges can consolidate with the principal amount and increase the total payable debt to a significant margin. Understanding the charges on loan against property and calculating it beforehand can help an applicant lower the total expense by a significant margin.

These are some of the primary benefits of availing credit at a fixed rate of interest. However, selecting a fixed rate of interest can attract 1% to 2% higher interest rate when compared to the floating rates. Also, borrowers are likely not to benefit from a drop in market rate as the interest rate in their line of credit will not be affected. 

Despite these facts, lenders still offer attractively low mortgage loan interest rate to eligible borrowers. Lenders like Bajaj Finserv offer a lowest of 10.10% for salaried applicants and 10.50% for self-employed applicants looking for a loan against property. Such affordable rates make it easier for any borrower to repay the amount without worrying about overshooting their budget.

They also provide pre-approved offers that make the process of applying for a credit simple and timesaving. Pre-approved offers are available on several financial products, including secured credits like home loans and loan against property and unsecured credits like personal loans and business loans.

When To Choose A Fixed Rate Of Interest?

Fixed interest rates are ideal for lenders who do not associate with any market risk. Also, if the market possesses a risk of increasing interest rates in the near future, it is better to lock in with a fixed interest rate. Hence, Borrowers must draw a comparison between Fixed vs Floating Interest Rate before availing one. 

Low rate of interest, flexible tenure and borrower-friendly terms make this financial product ideal as a long-term financing option. 

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