Fixed Vs Floating Interest Home Loans: Which is right for you?
• August 14, 2024
When we decide to build our dream home and avail of a home loan to finance it, we are faced with a dilemma. Do I choose a fixed interest rate or a floating one? This is a crucial decision because it determines how much EMI you pay and for how long.
Buying a home involves a sequence of important decisions that impact your life. The first decision is to move from a rented place to a place you own. The next decision is choosing a budget and a preferred location. Eventually, you arrive at the matter of housing finance.
Questions like—How much of my savings do I invest? How much loan do I avail of? How much monthly EMI can I repay? How long would it take to repay this loan?—begin to race through your mind.
The answers to the last two questions above rest on the type of interest rate you choose. In the housing loan market, there are two types of house loan interest rates presented to you: fixed and floating interest rates. Knowing how these affect your repayment and monthly finances can be the difference between a stressed and a relaxed monthly financial plan.
Let’s take a look at both. And, by the end of this blog, hopefully, you will have an idea of what to choose to work in your favour.
Floating Interest Rate
Floating interest rates are adjustable house loan interest rates that depend on market fluctuations. The interest rate revision occurs every quarter. The lender issues your loan at a base rate determined by the Reserve Bank of India. The interest rate is revisited every quarter, and if there is a fluctuation in the base rate, the interest rate is adjusted. Consequently, your repayment period is adjusted to accommodate this fluctuation.
The fluctuation in your home loan interest rates will not affect your EMI. Instead, only the loan repayment period will change.
Fixed Interest Rate
Fixed interest rates, as the name suggests, are constant house loan interest rates throughout your home loan period. They are unaffected by market fluctuations. This type of interest rate is ideal when you are comfortable with the monthly EMI and have considered it in your monthly financial planning.
A fixed rate home loan gives you certainty of your repayments. You can take into account the interest rate, the monthly EMI, and your repayment period and make financial decisions about the future.
Now that we’ve understood what each is on the surface let’s see the differences between the two.
Differences Between Floating and Fixed Interest Home Loans
Floating | Fixed |
| The interest rate remains fixed throughout the loan period | The interest rate changes with fluctuations in the market |
| The interest rates are lower | The interest rates are 1-2% higher than the floating rates |
| There are no prepayment penalties. When interest rates go low, borrowers can pay in advance and opt to close their loans earlier | There are prepayment penalties |
| These loans make future financial planning tricky | The certainty around your monthly EMI and tenure allows future financial planning |
| This is a risky option | This is a safer option |
Merits and Demerits of a Floating Rate Home Loan
Merits
- The interest rate is lower than that of a fixed interest home loan.
- Even if the interest rate becomes higher than a fixed rate home loan, it will eventually fall and become lower.
- It helps save considerable money during repayment.
- There is no penalty for prepayment during periods of lower interest rates.
Demerits
- The interest rate will increase if the base rate of the market increases. This increase will increase the tenure of your repayment.
- This is a high-risk option.
- With high uncertainty, floating interest home loans make planning for the future tricky.
Merits and Demerits of a Fixed Rate Home Loan
Merits
- Managing finances becomes easier because the interest rate stays the same.
- It provides the borrower certainty to make future financial plans.
- This is low risk because you aren’t affected by market changes.
- You can forecast your monthly budget because you’ll know your EMI amount.
Demerits
- The interest rate is higher than that of a floating interest home loan.
- Borrowers do not gain the advantage of the falling base rate when the markets dip.
- There are prepayment penalties because lenders lose money, which you would have otherwise paid as interest.
What if You’re Still Confused?
If you are still unsure, talk to a banking representative and check for combination loan options. The bank wants to give you a loan and, it will advise you on the best possible options.
Optionally, you can start with a floating rate home loan and eventually change it to a fixed rate home loan if the inflated interest rate is unbearable. The bank will levy a charge, but this option is still better than paying a lot more as interest.
In Closing
The decision to build a house is a big one. And, in today’s market situation, it can be an expensive decision. But by choosing the right type of interest rate in the housing finance market, you can live a stress-free life in your new home.
Ultimately, you must understand the benefits of both types of interest rates and exercise diligence while choosing. If you can get expert advice to anticipate market conditions, it can help you emerge prosperous and enjoy the achievement of building a home.
Frequently Asked Questions
Which is better: floating or fixed interest home loans?
Why are floating rate home loans popular?
Can I convert floating rate home loans to fixed rate home loans?
Are there penalties for prepayment in either case?
Is there a big difference between floating and fixed interest rates?