Floating vs Fixed Home Loan Interest Rates

The interest rate is a crucial factor to consider when getting a home loan. Choosing between fixed and floating rates can be tricky, especially for first-time borrowers. A fixed rate makes it easy to budget and plan your finances. Meanwhile, floating rates can help you make the most of market fluctuations. So, which one to go for? Let’s understand the two types of interest rates and find the one that suits your requirements the best.

A fixed home loan interest rate stays stable during the entire loan tenure. It is not affected by changes in market trends, lending charges, or repo rates. Thus, the EMI remains unchanged during the lending period. You can use this insight to plan your investments and expenses appropriately. This enables you to budget for the repayment of the home loan efficiently.

A fixed rate is an ideal choice if the interest rate at the time of taking the loan is considerably low. For instance, if the interest rate was 15% about 3 years ago and has now dropped to 9% p.a. In this case, a fixed home loan interest rate may be beneficial. The interest rate does not fluctuate, providing greater stability.

A floating home loan interest rate is quite different from a fixed interest rate. Firstly, the interest rate constantly changes over the loan's tenure. This makes it difficult to predict the EMIs payable. It is to be noted that as the rates increase during the period, the borrower ends up paying more money. However, if the interest rates drop, you will benefit by paying lower EMIs. Floating interest rates offered by a lender are lower than a fixed interest rate. This implies that even if the floating rate rises, it can be lower than the fixed rate offered by lenders.

Floating home loan interest rates are for those with a higher risk appetite. If you understand market conditions and changes in the repo rate, a floating rate may be suitable for you. However, if you are no expert and are wary of floating rates, consider them only if your loan tenure is short. In such cases, when a lender increases the floating interest rate, the tenure of the loan is increased. Meanwhile, the EMI amount remains constant. Conversely, the lender may increase the instalment amount while the tenure remains unchanged.

Here are some key differences between the two interest types that you can consider:

Both fixed and floating interest rates have their pros and cons. It is important to understand these in detail before selecting the type of home loan interest rate.

Consider this example. The interest rate was 15% p.a. about 3 years ago and has now dropped to 9% due to changes in the bank’s lending rates. In this case, a fixed home loan interest rate may be beneficial. The interest rate does not fluctuate, providing greater stability. 

Now, here’s another example. You want to take a home loan for a tenure of just 5 years. The rate of interest is fixed at 7% p.a., which is quite attractive. Now, this may be an opportune time to opt for a floating interest rate. With a floating rate, you may be able to enjoy rates as low as 6% p.a. The shorter tenure can protect you from drastic market fluctuations. It can also make your loan repayment affordable.

Ultimately, the decision depends on your preferences and the market conditions. Conduct thorough research and apply for an option that suits your requirements.