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Floating Vs Fixed Interest Rate Home Loan - Which One Is Better

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  • Floating Vs Fixed Interest Rate Home Loan - Which One Is Better?

  • Fixed Interest Rate: What Is It?

  • Floating Interest Rate: What Is It?

  • Which Home Loan Interest Rate Should You Choose?

Buying a home for the first time, especially with a home loan, can be quite a tedious job. You have to consider numerous factors before you decide on taking a loan. If you are wondering how to reduce home loan interest rates, you should always keep in mind the types of interest rates. This is the case because the type of rate of interest will ultimately determine affordability. In this aspect, floating and fixed interest rate home loans are your two options. In this piece, you will better grasp the concept of floating vs fixed interest rates.  

What is Home Loan Refinancing?

When the interest rate for 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 when you opt for a home loan, and you will be paying the same amount of EMIs every month.

Benefits

  • Highly predictable: The rate of interest remains the same throughout the tenor of home loan. So you will be able to predict your monthly financial expenses.
  • Easily understood by beginners: Even if you are an amateur with respect to banking and finance, you will be able to understand this interest rate easily. 

Drawbacks

  • Costlier: Fixed interest rates are usually placed higher than the floating ones. They exceed the floating rate by at least 1% or 2%.
  • Short tenor: This interest rate comes with a shorter tenor. There are chances that fixed interest rates will not last the entire tenor of your home loan, and this makes your situation more vulnerable. 

Floating Interest Rate: What Is It?

A floating interest rate, also called an 'adjustable' home loan rate, is a type of home loan interest rate that varies with the prevailing base rate in the market. This rate is associated with the lender's benchmark rate and moves in close sync with the market forces. If you go for a floating interest rate, then you will have to come across a specific rate at a particular time. The floating rate of interest can change once every three months, or it can also change once every six months.

Benefits

  • Can be cheaper: Floating interest rates have the advantage of being more affordable, 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%.
  • Cost-effective: In the long run, floating interest rates are cost-effective. Even if there is a hike in the rate in the current month, chances are that the rate will fall in the long run.

Drawbacks

  • Payment variability: This interest rate, owing to its fluctuating nature, makes your monthly EMIs variable. You will not be able to predict how much more or less you must pay the following month.
  • It makes budgeting difficult: Every month, your instalments will be in variable amounts. So you will lack a payment schedule, and this might make budgeting for the month a bit difficult. There can be chances of you spending more than the estimate.

Which Home Loan Interest Rate Should You Choose

As you can obviously see, there are many 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 A 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 grab a fixed loan. For example, suppose the rate of interest a few years back was 13%, and when you are taking the loan, it has fallen to 11%, you should go for a fixed interest rate.

You can also go for this interest rate if you are comfortable paying the current monthly interest amount. You must make sure that this amount ranges from 25% to 30% of your monthly income.

Choosing Floating Interest Rate

You can go for a floating interest rate if you are predicting that the rates will fall over time. 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. Therefore, if you would like to cut interest cost when taking the loan, then you should opt for a floating interest rate.

Choose What is Right for You

If you are thinking of go for a home loan, then we hope that this piece was helpful towards clearing your doubts regarding the interest rates. Yes, it is quite a tricky choice, but we hope that now you will be able to make an informed decision.  

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