How To Plan Your Finances When Opting For A Floating Interest Rate

Housing loans require a different sort of financial set up than other kinds of loans, for they are essentially long term and it is essential that you sustain your finances during the entire payment period. Now they are two kinds of housing loan interest rates that you can opt for- fixed interest rate and floating interest rate. Choosing between the two has preoccupied minds and been the cause for many an anxiety attacks for potential customers of housing loans . The choice depends on your repayment preference and your current financial status.

The key aspect of a floating interest rate is that it fluctuates with the market dynamics and where its interest rate is linked with the base rate and a floating component. This brings in a factor of uncertainty since the monthly EMI will fluctuate with each instalment of the loan. If you are okay with this constant decrease and increase of the interest rates, then a floating housing loan interest rate is preferable. This is because its rates are usually lower than a fixed interest rate and is ideal when a long-term loan is more preferable than say, five-year long loan tenure.

If what you have opted for is a floating interest rate, there are a few things to note in this type of housing loan interest rate:

* Obtain complete information: Find out the lowest and highest extent to which the interest rate can fall according to your bank’s chosen market index.

* Regular updates: Be sure to keep checking your loan account to stay updated about the market trends, especially when interest rates go the downward way. Make sure that it reflects in your loan interest rate.

* Financial strength: You should be comfortable with the fluctuating EMI rates. The EMI should never be more than 35% of your salary. Calculate the probable maximum and minimum EMI’s that you may have to pay up during the tenure. It should never exceed the comfortable zone of your finances.

* Control your expenditures: If there is a slight chance of your finances being a little tight and if you’re still willing to take the risk because of the lower interest rate, then tighten your expenditures and monitor your monthly spending. Try to not reach such a stage though.

* Chance of a lump sum or increased salary: Floating interest loans are very advantageous if you plan to pay it off in five-seven years. This means that your interest outflow is much lower and so is the impact of the market fluctuations. So if there is a chance of you receiving a lump sum in the near future, all is good and you’re well set to pay off your loan comfortably.