When you take a loan to finance a home, the biggest decision you will possibly have to make is between a fixed or floating interest rate. Both have their advantages. But if you do not choose wisely, they can end up costing you a great deal of money in the long term. With the fluctuation of the economy and the current home interest rates, it is worthwhile to learn about these interest options. Let us break it down so that you will be able to select the one suitable for you.
What is a Fixed Interest Rate?
A fixed rate of interest implies that the interest on your home loan is fixed for the loan tenure. No matter what happens to market rates or repo rate changes, your EMI will not change.
This gives security and peace of mind, especially for individuals with a fixed income. You know exactly how much you are going to pay every month, and it is simple to budget for every month.
What is a Floating Interest Rate?
Floating interest rates are linked to an external benchmark. Most commonly, the RBI’s repo rate plus a spread determined by your lender. Such rates move in line with market rates and are typically reset every 3 months, 6 months, or once a year, depending on the lender’s policy.
So what do you get out of it?
If the market rate increases, your term for the loan can be extended. If it decreases, your term will be shorter. Your EMI does not change unless you choose to pay more. Floating rates are optimal if you are expecting a decline in current home interest rates, especially for the short term.
Important Differences Between Fixed and Floating Rates
Here are the key differences between fixed and floating rates:
| Factor | Fixed Interest Rate | Floating Interest Rate |
| EMI Stability | Fixed for loan duration | May change with interest rate cycles |
| Market Dependency | Not impacted | Highly dependent on repo rate changes |
| Initial Interest Rate | Usually higher | Usually lower |
| Prepayment Charges | Often applicable | Usually minimal or none |
| Long-Term Cost | Predictable, but may cost more | Variable may save if rates fall |
When to Use Fixed Interest Rates
Fixed rates are suitable if you get a fixed income each month and prefer to plan through consistent EMIs; this is a safe bet.
It is also a wise move when current home interest rates are low, but will likely increase in the near future. With a fixed rate, you can prepay at the lower rate and escape future increases. This is especially handy for long-term loans of over 10–15 years.
When to Use Floating Interest Rates
If you can handle fluctuations in EMI or loan term, floating rates may be more economical. In short-term finance or where interest rates are expected to decline, floating rates are very economical.
They also offer flexibility. Banks give you the option to convert to a fixed rate later at a nominal charge. Just ensure that you read the terms and conditions thoroughly. More often than not, most lenders offer floating rates by default because they have lower initial rates, so your loan appears more attractive on paper.
Other Factors to Consider Before Choosing
Before locking in your interest type, consider these:
- Loan Tenure: Floating rates are suitable for short tenures, while fixed rates are suitable for long-term loans.
- Economic Forecast: Will interest rates increase or decrease over the next two years? Monitor RBI repo rate movements.
- Repayment Capability: Can you repay variable EMIs or extended tenures if the market rate increases?
- Switch Options: Some banks have hybrid loans that start with a fixed rate but switch to floating afterwards.
Secondly, your home loan eligibility could also affect the rates you are offered. Your good credit history can allow you to negotiate more favourable terms, irrespective of the type of rate.
Takeaway
Whether to choose fixed or floating interest rates depends on the individual’s finances and choices. The decision should be based on your investment goals, perception of the market and risk tolerance. Fixed rates provide you with certainty, while floating rates provide you with potential to save. Before deciding finally, verify home loan interest rates, review your home loan eligibility, and calculate long-term costs with loan comparison websites.
