Floating Interest Rates in the Case of Mortgage Loans

Mortgage loans, also known as loans against property, are a type of secured loan. A borrower who needs money urgently can arrange funds by pledging a residential or commercial property as collateral. Some lenders even accept land as an asset or collateral. In case the borrower defaults on loan payment, the lender can sell the pledged asset for loan recovery. If the borrower repays the loan on time and as agreed, the lender loses all rights over the property and the property automatically gets transferred back to the borrower. 

Lenders sanction loans against property on two different types of interest rates: fixed and floating interest rates. In the case of fixed interest rate loans, the rate of interest remains the same through the tenor of the loan. The risk for the lender is higher in the case of fixed interest rate loans and therefore, lenders charge a higher rate of interest when a borrower avails of a loan on fixed interest rates. When borrowers avail of a property loan on floating interest rates, the rate of interest varies with changing market conditions. In general, floating interest rate mortgage loans are repo-rate linked loans and in the case of these loans, the interest rate changes with changing market conditions. The Repo Rate is the rate at which the RBI lends money to commercial lenders within the country. When the RBI increases the Repo Rate, the rate of interest charged on mortgage loans become higher. On the other hand, when the RBI reduces the interest Repo rate, mortgage loan interest rates become cheaper and the EMIs go down. 

If you are planning to avail of a mortgage loan, here are a few things you must keep in mind. 

- To start with, mortgage loans are secured loans. In case of loan defualt, the lender can sell the property for loan recovery. Therefore, borrowers must avail of these loans after proper planning and must avail of a loan amount that they can easily repay. Using a mortgage loan calculator can help in this regard. 

- Mortgage loans are big-ticket loans and therefore, even a small difference in the interest rate offered can help one save a lot of money in the long run. Thus, borrowers must avail of these loans after negotiating with different lenders and getting an understanding of what each lender is offering. In the end, they must go with the lender offering them the lowest interest rate. However, they must also check the reputation of the lender and make sure they are trustworthy.

- Some borrowers think that since mortgage loans are secured loans, their credit score won’t matter. This is a myth. If you are applying for a mortgage loan, make sure your credit score is at least 750. A credit score lower than this will either lead to your loan application getting rejected or you being extended a loan offer at a much higher interest rate. 

- If you want to avail of a low interest rate mortgage loan, opt for floating interest rates. Fixed interest rate mortgage loans are more expensive. Further, since the quality of the collateral also influence mortgage loan interest rates, try and pledge a property with high resale value. 

Mortgage loans are an excellent way to raise funds. However, these loans must be availed of after proper planning. Keep the above points in mind if you wish to experience a completely hassle-free mortgage loan journey.