Finance

Home Loan Interest Rates: Floating vs Fixed

In these times, getting a home loan is as simple as ordering something online if you complete certain criteria. But a little dilemma arises when you have to choose a rate of interest. The interest rate offered by banks is one of the most important factors to be considered when finalising the home loan. Which one should you choose and which one not has always been the dilemma between the borrowers? Even after selecting the particular interest rate of a certain financial institution, things don’t get much easier as the interest rate is further categorised into two parts.

There are two types of home loan interest rates, 

  1. Fixed-Rate of Interest
  2. Floating Rate of Interest

 Borrowers need to decide between the two, so therefore we need to understand the difference in detail. The decision to choose between a floating or a fixed rate of interest has always confused borrowers. 

Fixed-Rate of Interest

This one is easy to decode as the name suggests a fixed interest. Here there’s a fixed amount of interest for the entire tenure for your home loan. A fixed interest rate is all it says. This provides the power to know how much it is going to repay over the tenure, way too before you sign any agreement. The EMIs (Equated Monthly Instalments) will remain constant throughout the loan tenure. The rate of interest won’t change irrespective of the change in the market, which is also called Repo rates.

Floating Rate of Interest

On the other hand, there is a floating rate of interest which says that nothing is fixed; the interest rate will differ from the repo rates(market rates). These rates are based on the policy rates set up by the Reserve Bank of India. If they announced that the rates would go up, it would directly reflect in your home loan interest or if they go down, vice versa. Floating rates are regulated in a certain period of time, depending upon the bank. Whenever there’s a change, there will be a change in your EMIs or loan tenure.

There are certain advantages and disadvantages of both. Knowing about that will give you a better understanding and will help you in making a calculated decision. 

Advantages of choosing Fixed Rate of Interest

  • No matter how high the market goes in the coming years, the amount, interest rate, and tenure remain constant. There would be no effect of inflation on your rate of interest.
  • It gives you stability and a calculated number of how everything will be going on a certain level.

Advantages of choosing Floating Rate of Interest

  1. They are 1 to 2.5% less than a fixed rate of interest.
  2. Nowadays, home loan borrowers, with the help of an EMI calculator concerning the market growth pattern and government policies, calculate the loan, making it further easy for the borrower.
  3. It always has the hope that if the market prices go down, it will be way too easier for the borrower to repay the amount.
  4. Floating rates give the liberty to the consumer to prepay the home loan without any penalty.

Disadvantages of Floating Rate of Interest

  • Higher Risk is the main point. Nothing is fixed, so if the market goes high, the borrower will be in a problem.
  • Difficult to budget or manage finances as predictions are the only source to rely on.

Disadvantages of Fixed Rate of Interest

  • Higher Rate of Interest than floating one, and that too it is constant. So even if market rates fall down tomorrow, you’ll still be paying the same rate of interest.
  • It is usually 1 to 2.5% higher than the general floating rate of interest.

So the final question arises, which type of home loan interest rate to choose or which one not? So, the answer to this is, it completely depends on you. If you’re a person who is ready to take some risk, a floating one would be better, or if you want stability, the fixed one.

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