The Difference Between Fixed or Floating Rate: Which is Better for a Home Loan?
A Home loan is a unique financial option available for people who want to realize their dream of purchasing their own home. With required home loan eligibility, you can borrow as high as up to Rs.3.5 crore from leading banks and other lenders.
However, as you know that a home loan contains a higher loan amount which you need to repay to the lender, it is considered a long-term commitment. The home loan EMIs that you need to pay to your lender affects your monthly income.
What’s more, along with the home loan EMIs, you also need to pay either Floating interest rate or fixed interest rate. Let’s discuss the difference between floating and fixed interest rate and which one is better if you want to avail a housing loan in future.
Fixed vs. Floating Interest Rate
When it comes to choosing the right type of interest rate, every prospective home loan borrower is confused between the floating interest rate and the fixed one. Lenders offer both home loan interest rates to customers.
Since home loan rates are one of the major things that could hamper your income for long, you need to be careful while choosing one.
Availing a fixed rate on the home loan would mean that the EMI for the loan would remain constant throughout the tenor of the tenor. On the other hand, the home loan EMIs would go and down or fluctuate as per the trends in the market.
Pros and Cons of Choosing the Fixed Interest Rates
As home loan tenor runs for a longer time, opting for the fixed interest rate may bring clarity to your home loan repayments. People who are salaried or with a fixed budget can clearly know how much they need to put as the EMI and make arrangements.
The biggest disadvantage of the fixed interest rate is that they are always anywhere between 1-3% higher as compared to the floating interest rate. You would see most lenders offering you the fixed interest rate only for a few years and not for entire tenor.
Hence, once that phase is over, the borrower will be exposed to the floating interest rates. Thus, it’s better to be aware of the fine prints of your home loan deal.
Advantages and Disadvantages of The Floating Interest Rates
As discussed earlier, the floating interest rates keep on changing as per the economics of the market and are attached to a banks’ MCLR and the base rate of the NBFC.
These rates are decided by banks and non-banking finance companies as per the notifications issued by the Reserve Bank of India on quarterly base price. Usually, the floating interest rates are lower than the fixed rate.
The popularity of the Housing Loan floating interest rates has surged in the recent past as a large number of people are opting for this and paying fluctuating home loan EMIs. If they pay a higher EMI one month, they also pay a lower EMI some other time. Thus, taking the risk of paying the fluctuating EMIs is paying off for them to save some money.
Even financial experts are of the opinion that interest rates are likely to fall further in the next 2-3 years, and opting for the floating interest rate is a good idea.
On the other hand, fixed interest rates will remain beneficial for people with a fixed income and who are availing a loan for a longer tenor such as 20 years or more.
For short-term home loans, opting for the floating interest rate is a good move to save money.
Category: Loans
