Fixed-Rate Vs Floating Rate in Home Loan: Which One Is Right Option For You?

Ms Singh, an investment banker, has been promoted this year because of her talent and dedication. She now feels fully ready to invest in a property and start living alone. After approaching some lenders for a home loan, she is deciding between a fixed-rate loan and a floating rate loan offered by them. 

Which one would be ideal for her? 

Considering that both the EMI outgo and repayment plan will affect this decision, one should acquire detailed information regarding fixed and floating interest rate home loans before choosing. 

What Is a Floating Interest Home Loan? 

Often termed as ‘adjustable-rate home loan’, this particular type of home loan is linked with the benchmark rate of financial institutions. The rate keeps changing according to the changes in market trends. The benchmark or base rates are decided following the RBI guidelines, and a slight change in these rates automatically affects the rate of interest on the loan.

What Is a Fixed Interest Home Loan? 

As the name suggests, a fixed interest home loan remains unchanged throughout the repayment tenor. This is the rate borrowers get offered at the time of availing the home loan and remain constant for the term of their loan.  Typically, financiers set fixed interest rates 1%-2% higher than current floating interest rates.

While opting for a fixed interest home loan, borrowers get an idea of the EMI they will have to bear for the entire duration. This further helps in budgeting accurately and planning the finances better.

Also Read – Home loan for women

Benefits of Floating Interest Home Loan 

Here is a list of advantages potential borrowers may expect from a floating interest rate home loan:

• Offered by several NBFCs and financial institutions, floating interest rates remain quite lower than the fixed rates. 
• Even if these rates increase depending on the market condition, this change will not be for the entire loan tenor. After a specific period of time, these rates might drop, making your EMIs affordable. 

Note that financial institutions try to avoid frequent revisions to your EMI even if interest rates fluctuate due to the change in market trends. That is why your repayment tenor gets adjusted when floating interest rates increase. However, you can still go ahead and request the lender to revise the EMI instead of the tenure.  

Benefits of Fixed Interest Home Loan 

Here are some perks that a fixed interest home loan comes with:

• The rate of interest on your home loan stays intact despite the changes in market situations. 
• Since your EMI amount remains fixed, it becomes easier to plan your finances and long-term financial investments.  

Owing to the sense of certainty this particular type of interest rate brings while opting for high-value home loans, you get to manage your financial liabilities conveniently. However, keep in mind that in the case of long-tenure credit facilities, some lenders switch from fixed rates to floating interest rates after a few years. Make sure to go through the terms and conditions to avoid such confusion.

Also Read – Claim additional tax deduction benefits on home loans

Drawbacks of Floating Interest Home Loan

Certain limitations of floating interest home loans are given below:

• Since the rate of interest is entirely dependent on the market conditions, it often increases to a point when it becomes a challenge to continue paying the EMIs. 
• When the inflation rate is on the higher side, interest rates go up. At that time, individuals availing home loans at floating interest rate will automatically get burdened with higher EMIs.

Drawbacks of Fixed Interest Home Loan 

In this case, too, you will find some limitations, have a look:

• The rates are mostly 1%-2% higher than floating interest rates offered by financial institutions and NBFCs.
• In the near future, if lending rates decrease, borrowers will not be able to benefit from the reduced interest rate. 

When is Opting for a Floating Interest Home Loan Ideal? 

As a potential home loan borrower, you can opt for a floating interest home loan in the following circumstances:

• In case you are expecting that interest rates will be reduced over time, go for floating rates as it will decrease the cost of your loan too. 
• In case you are unsure about interest rate movements and want to go with market rates.
• If you want to make significant savings on your interest cost in the near term, go for a floating interest rate.

When Is Opting for a Fixed Interest Home Loan Ideal? 

You should choose a fixed interest home loan in the following situations:

• If you are comfortable paying the monthly instalment amount set from the beginning of your repayment tenure
• In case you sense that the interest rates are going to increase in the future and want to lock in your loan at the current rate
• If you notice a decline in the interest rates and you will be comfortable paying the EMIs at the reduced rate 

Final Word

Navigating the home loan market can be tricky, especially with so many variables. Therefore, you need to pick a dependable financier to maximise the benefits of secured credit facilities like home loans. 

As you can see, both the fixed and floating interest rate home loan has certain advantages as well as drawbacks. However, while deciding, assess your repayment capacity and choose the option that does not affect the overall home loan cost. Also, compare different lenders and their offered interest rates. Download the Navi app to find attractive deals!

Frequently Asked Questions 

Is there any prepayment penalty on floating interest home loans?

No, if you decide to prepay your home loan, which was taken at a floating interest rate, you will not have to bear additional charges. However, make sure to discuss the same with your lender before availing the loan.

Can I shift from a fixed rate of interest to floating interest rate?

Yes, you can switch to floating interest rate if you availed a home loan at fixed interest rate or vice versa. However, keep in mind that most of the lending institutions levy a nominal conversion fee for this. 

Is a fixed interest home loan the best option for a 40-year-old borrower?

For individuals who are of age 40 and above, the remaining repayment tenure should be up to 20 years. It is ideal to opt for a fixed interest rate home loan if the rates are lower at that point. 

Does floating interest rate depend on the change of repo rate?

Yes, the repo rate is one of the factors 

responsible for the change of floating interest rate. For instance, if the RBI decides to slash the repo rate, floating interest rates will inevitably come down.

Can I opt for pre-sanctioned offers while choosing a floating interest rate home loan?

Generally, interest rates offered by financial institutions while extending pre-approved offers remain fixed. It is ideal to discuss with lenders whether you can shift it to a floating interest rate in the future.

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