Fixed vs. Floating Interest Rates: Which is Right for Your Loan?

If you are planning to purchase a new home and apply for a home loan for it, you must make an important decision, i.e., choose the right interest type. Generally, the financial organisations in India offer home loans with two different types of interest – fixed and floating interest rates. 

When you borrow a home loan, you would be obliged to repay the amount in EMIs (equated monthly installments) through the loan term you choose, it is critical that you make the decision about the interest type carefully as it would have a direct impact on the EMI amount as well as your overall finances. 

In this guide, we compare fixed interest rates and floating interest rates to help you get a clear understanding of the differences between them and make the right decision. Read on!

 

What is a floating interest rate?

Floating interest rates are also commonly referred to as flexible interest rates. When you apply for a home loan with a floating rate, the interest rate tends to be variable, and it may move up and down throughout the loan tenure based on different external factors, like current market conditions, changes in RBI (Reserve Bank of India) guidelines, etc. 

This means that the ratio of the principal amount and the interest you repay the lender through EMIs may vary as per the changing interest rates. Most home buyers have this false notion that floating interest rate home loans tend to be more expensive in the long run as the market conditions can be quite unstable. 

However, the reality is floating interest rate home loans tend to be less expensive. You can take advantage of the lower interest rates when the market condition is conducive. The interest rate itself is generally a few points lower than the fixed interest rate of home loans. 

 

Let us know more about its advantages and drawbacks. 

Advantages 

• The floating interest rates are lower as compared to fixed interest rate home loans. Additionally, it can decrease further through the loan tenure. Thus, it gives you the opportunity to enjoy valuable savings on interest payments. 
• When the market conditions are good, you can benefit from the interest rates from low-interest payments. 
• According to RBI guidelines, no financial organisation in India can levy any kind of penalty or additional charges on partial or full prepayment on home loans taken on a flexible interest basis. Thus, it gives you the flexibility to prepay the amount based on your financial condition and be debt-free faster. 

 

Drawbacks

• Since the interest rates tend to vary, the EMI amount may also vary through the loan term. This can make financial planning and monthly budgeting challenging for you. 
• When the market rates increase, the interest on your home loan may also increase. This means you would have to make higher payments, which can be a burden on your finances. 

 

What is a fixed interest rate?

In a fixed interest rate home loan, the interest rate is determined at the time when the lender sanctions your loan, and it remains unchanged throughout the loan term you choose. Fixed interest rate home loans offer excellent financial stability against the market movement that can be quite volatile. 

 

Let us know more about its advantages and drawbacks. 

Advantages

• Since the interest rate remains fixed, the EMI also remains fixed. Thus, it allows efficient financial planning, and you can keep a fixed sum aside every month for loan repayment. 
• It gives you peace of mind knowing that the external market conditions will have zero impact on your home loan EMI and interest rate. 
• Fixed-rate home loans are easy to understand and manage since the interest structure is simple. This is especially true for those who are not very financially savvy or have no prior experience with applying for a loan. 

 

Drawbacks

• If you are looking for the best home loan offer with a low interest rate, then choosing a fixed-rate home loan may not be a wise decision. This is because, in fixed-interest rate home loans, the interest rate is generally a few points higher as compared to floating interest rates. 
• In fixed interest rates, you may miss the opportunity to save on the interest payment when the market condition is favourable. 
• Another significant drawback of applying for a home on a fixed interest basis is that if you choose to prepay the loan partially or want to foreclose the loan, i.e., pay off the full amount before the actual tenor, you may have to pay a prepayment penalty. This in turn, may become a hindrance from paying off the loan earlier. 

 

Conclusion

At the outset, having to decide between a floating interest rate and a fixed interest rate home loan may seem to be an overwhelming task. However, when you understand the difference between the two and their impact on your finances, you can make an informed decision to suit your repayment capacity and financial goals. 

And, while looking for the best home loan offer online, it is advisable that you do your due diligence and compare the offers from different financial organisations. Also, it is better to choose a reputed lender like India Shelter, which is one of India’s leading NBFCs (non-banking financial company). 

They offer you a home loan of any amount ranging from Rs. 5 Lakh to Rs. 50 Lakh and help you purchase your dream home. Also, they offer the loan at a competitive interest rate for an extended period of up to 30 years. Thus, you can easily manage the repayment without compromising on your other financial goals.