Should You Opt for a Fixed or a Floating Home Loan Interest Rate?

| October 10, 2017 | 0 Comments

Home LoanTaking a Home Loan is an important decision in any person’s life as he has to spend years repaying the loan that he has taken. There are many banks and financial institutions who provide financial aid in the form of Home Loans to the people who want to buy their dream home. There are a lot of first-time buyers who get confused as to which Home Loan scheme might be useful for them.

One of the important things to be kept in mind while applying for a Home Loan is the rate of interest that the financial institutions offer. Different financial institutions offer a different rate of interest.  There are two types of Home Loan interest rates: fixed interest rate and floating interest rate. In fixed interest rate, the interest amount that you have to pay is fixed, whereas in floating rate of interest the interest amount that you have to pay keeps changing.

Fixed Interest Rate:

As mentioned above, when you opt for a fixed rate of interest, the interest amount that you have to pay per month is fixed. This type of interest rate is not affected by market fluctuations. You will be paying the same interest amount for the entire tenor of your Home Loan. During the initial period of the repayment, a major part of the EMIs that you pay is actually the interest amount.

Benefits of fixed interest rate:

Since there is no change in the rate of interest that you pay, you get an exact idea about how much interest amount you have to pay on your Home Loan. This is beneficial for people who like to be in the known and want to avoid any unwanted expenses in the future. A fixed rate of interest will help you make a proper budget and manage your finances in a better way.

  • Drawbacks of fixed interest rate

One of the biggest disadvantages of fixed interest rate is that your interest rate will be the same throughout the tenor of the Home Loan. There might be times when you end up paying a higher interest amount as compared to floating rate of interest.

Floating interest rate:

If you opt for a Home Loan with a floating rate of interest, the interest amount that you will pay will keep changing according to the current market environment. A Home Loan that has a floating rate of interest comes with a base rate and a floating element. If there is an upward or a downward change in the base rate, the floating interest rate will also be changed accordingly.

  • Benefits of floating interest rate:

If you compare the fixed rate of interest with a floating rate of interest, a floating rate of interest will be cheaper. The floating rate of interest is easily affected by the market conditions, hence, it varies a lot. Even if the rate of interest is high for a few months, it will never be high for the entire tenor. So, there will be times during the tenor when the rate of interest will be low. Hence, it will also help you save some money.

  • Drawbacks of floating interest rate:

Since the rate of interest keeps changing, you can never plan your budget in advance. Over the period of time, the constant changes will become erratic. A floating rate of interest is only helpful when the rate of interest that you have to pay is low.

The decision to opt for a fixed rate of interest or a floating rate of interest should be totally dependent on your current financial standing and your financial needs. It is necessary that the decision to take a Home Loan should be taken after a lot of thought process. As a Home Loan will affect your financials for years to come.

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Category: Housing, Mortgage

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