Fixed & Floating rates
Most of the Home Loan aspirants get confused when it comes to choosing the right interest rate option for their home loan. Interest rates are the most important aspect of any loan, hence it becomes very important to select your interest type wisely. Talking about all these, many of us must be wondering about the types of interest for home loans. Well, banks and non-banking financial companies charge both fixed and floating interest rates for a home loan. Both are different from each other and choosing the correct one has lots of importance as it is going to affect your EMIs and total cost of borrowing.
However, using online home loan EMI calculators can help you know your estimated EMI and hence can help you decide your budget. But on top of it, we can’t afford to ignore choosing the correct type of interest rate for our home loan. So, let’s discuss both fixed and floating interest along with the differences between them, to help you understand them better.
What is a Fixed Rate Home Loan?
As the name suggests, fixed interest rate home loans come with fixed payments/EMIs for your home loan for the entire tenure. This is because the interest rate remains constant and there is no change in it with the market fluctuations.
Using a home loan EMI calculator will help you understand it better. However, in the initial stage, a major part of your EMI serves towards the interest and a minimum portion of it goes towards the principal repayment. While it changes after a few years and you pay a maximum amount towards your principal amount and a minimum on interest.
What is a Floating Rate Home Loan?
As the name itself suggests, when you opt for a floating interest rate for your home loan there will be a variation in the rates depending on the market conditions. Generally, the home loans on floating interest rates are associated with a base rate and a floating element too. This implies that the floating interest rate varies when the base rate varies.
Both rates have their own importance and pros and cons as well.
So, let’s differentiate them to clear your confusion-
|Features||Fixed Interest Rate||Floating Interest Rate|
|Interest rate||Higher interest rate||Lower interest rate|
|EMIs||Fixed EMIs||EMIs can vary along with rates|
|Market Influence||Not affected by market condition||Gets affected by market condition|
|Risks||No risk involved||Higher risk involved|
|Budget||Budget planning is easy||Budget planning is not possible|
|Security||This is secure||Not secures but can save some money|
|Ideal condition||Suitable for long tenure||Suitable for a short tenure|
Your interest rate plays a vital role in your home loan as it is one of the biggest financial decisions. Going with a fixed interest rate is generally favorable for longer tenure as lesser risk is involved in fixed rates. For example: When you go for a home loan for a tenure ranging from 5-10 years, a floating rate of interest is best for that. This means floating rates are best when going for a shorter tenure.
With floating interest, you are benefited when RBI decreases the interest rate. But, when you opt for a fixed rate you need to pay the same amount as EMI for the entire tenure. Here, the rates are not affected by RBI changes on the base interest rates.