Fixed vs. Floating Interest Rate on a Home Loan
Buying a home for the first time, especially with a Home Loan, can be a considerable task. You have to take into account numerous factors before you decide to avail of a Home Loan. If you are wondering how to reduce Home Loan interest rates, you should always keep in mind the types of interest rates available. The type of rate of interest will ultimately determine how much interest you will be paying. Floating and fixed interest rates are two popular options. Read on to learn more about them.
What is a Floating Interest Rate?
Floating interest rates for a Home Loan can be a good choice if the interest rates are predicted to fall in the future. This is because if the rates fall, they will impact the amount of repayment in the same way, and your loan cost will be reduced. Floating rates are set marginally lower in comparison to the fixed rates.
Benefits
- Floating interest rates have the advantage of being more competitive, irrespective of the fluctuations. There is no limit to the interest rate hike, yet it has been observed in most cases that they are cheaper than the fixed rates.
- In the long run, floating interest rates are cost-effective. Even if there is a hike in the rate in the current month, there are also chances of the rate reducing in the future.
Drawbacks
- This type of interest rate, owing to its fluctuating nature, may make your interest outflow inconsistent at times.
- Your EMIs are subject to change occasionally, depending on market conditions. This might change your ongoing repayment schedule.
What is a Fixed Interest Rate?
When the interest rate of your Home Loan does not vary with the prevailing base rate, it is called a fixed interest rate. This interest rate is not affected by market forces and remains the same until the interest reset date specified by the lender.
Benefits
- The rate of interest remains the same until the reset date. So, you can easily predict your monthly financial expenses.
- Even when Home Loan interest rate trends are high, a fixed interest rate still remains the same.
Drawbacks
- Typically, fixed interest rates are 1% to 2% higher than floating interest rates.
- Any changes in the rate are not applicable to the loans already borrowed. Borrowers need to continue with their existing rates.
Comparison Between Fixed and Floating Home Loan Interest Rate
Features | Fixed Interest | Floating Interest |
---|---|---|
ROI | The interest rate is high | The interest rate is standard |
EMI | The EMI amount remains the same throughout the tenure | The EMI amount may increase or decrease throughout the tenure |
Link | It is not linked to the Repo Rate | It is linked to External Benchmarks such as the Repo Rate |
Tenure | Comes with a shorter tenure | Comes with a longer tenure |
Affordability | Cost-effective in the short term | Cost-effective in the long term |
Additional Link: Important Factors that Affect Your Home Loan Interest Rate
Frequently Asked Questions
Yes, borrowers who have opted for a fixed interest rate do have the option to switch to a floating interest rate. While these policies differ from lender to lender, typically, such borrowers will be asked to pay a nominal premium to complete the switch.
Borrowers who have a home loan with a floating interest rate can prepay parts of the repayment above, without facing any additional charges – provided that they are individual borrowers who don’t use the sum to address business related concerns.
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