Differences Between Fixed and Floating Interest Rates

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 know more about them.

What is a Floating Interest Rate?

A floating interest rate is a type of Home Loan interest rate that varies along with the conditions impacting it. This rate is associated with the lender's benchmark rate, or an external benchmark, and moves in close sync with the market forces. 

Benefits

• Floating interest rates have the advantage of being more competitive, irrespective of the fluctuations. There is no limitation of the interest rate hike, yet, it has been observed in most cases that they are cheaper than the fixed rates by at least 1% or 2%.
• 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 the market forces and remains the same throughout your Home Loan tenor. Therefore, this rate is fixed, and you pay the same amount as EMIs every month.

Benefits

• The rate of interest remains the same throughout the tenor of your Home Loan. 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

• Fixed interest rates are comparatively higher. They can exceed the floating rate by at least 1% or 2%.
• Any rate changes announced by the RBI are not applicable to the loans already borrowed. Borrowers need to continue with their existing rates.

Comparison between Fixed and Floating Interest Rate 

Features	Fixed Interest	Floating Interest
ROI	Interest rate is high	Interest rate is standard
EMI	EMI amount remains the same throughout the tenor	EMI amount may increase or decrease throughout the tenor
Link	It is not linked to the Repo Rate	It is linked to External Benchmark such as Repo Rate
Tenor	Comes with shorter tenor	Comes with longer tenor
Affordability	Cost-effective in short term	Cost-effective in long term

 

Additional Link: Important Factors that Affect Your Home Loan Interest Rate 

Which Home Loan Interest Rate to Choose?

There are differences between floating and fixed interest rates. Both interest rates come with their own set of benefits and drawbacks. Each interest rate will be beneficial for you in a specific scenario.

Choosing Fixed Interest Rate

If you are expecting a rise in the interest rate in future, you can go for a fixed interest rate. Similarly, if the current rate of interest is lesser than what it was a few years back, now is the time to go for a fixed interest rate.

You can also go for this interest rate if you are comfortable paying the current monthly interest amount.

Choosing Floating Interest Rate

A floating interest rate 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 or repayment in the same way, and your loan cost will reduce. Floating rates are set marginally lower in comparison to the fixed rates.

Also Read: Top Five Ways to Manage a Home Loan Burden

Choose What is Right for You

If you are thinking of avail of a Home Loan, then we hope that this blog proved to be beneficial and cleared your doubts regarding the types of interest rates available to you. Yes, it is quite a tricky choice, but we hope that now you will be able to make an informed decision.