Fixed or Floating Interest Rate – Which one is suitable for your Home Loan?

Many home loan borrowers in India consider the interest rate as the most important factor before taking the decision. And, if you are looking for a home loan, you must choose between fixed interest and floating interest. Read on to know more about which interest type is better.

When it comes to applying for a home loan, most people make the borrowing decision based on the interest rate levied by the lender. Since, a home loan is one of the biggest credits you may avail in your life, you would want to ensure that the interest rate is low so that the EMI is affordable. Most lenders in India offer two types of home loans – fixed interest home loan floating interest home loan.

And when you apply for a home loan, you may feel confused about what to choose? Which is better? To help you make the right decision, we discuss the details of both interest types.

Fixed Interest Rate

As the name suggests, in fixed interest rate home loans, the interest rate remains unchanged throughout the loan duration. One of the reasons why many people opt for this interest type is that it remains unaffected by the changes in the financial trend or market fluctuations.

Another major advantage of choosing a fixed interest home loan is that you would know exactly the amount you must repay every month to the lender. This means you can plan your finances accordingly. Fixed home loan interest rates are an ideal choice if you are very particular about the monthly budgeting and want to plan your repayment and prefer paying a fixed amount every month.

While there are many pros of choosing a fixed interest rate home loan, it also has its cons. And, one of the major drawbacks is that the interest rate is generally 1% to 2% higher than the fixed floating interest rate. In addition, when the market condition is favourable, you don’t get the advantage of a lower interest rate, and you continue to repay a higher interest.

One of the important things you must know about fixed interest home loans before you sign the document is that you must read the terms and conditions carefully. Generally, most lenders in India offer home loans at fixed interest rate only for a few years, and later it is automatically converted to floating interest rate. So, if you want to maintain a fixed interest rate throughout the tenure, it is advisable to speak to the loan officer accordingly.

Floating Interest Rate

If you choose a floating interest rate home loan, the interest rates vary depending on the existing market condition and the changing financial scenario in the country. This means, if the Reserve Bank of India revises the base interest rate, the interest on your loan will vary.

Many experts recommend home loan borrowers to opt for a floating rate home loan because it is generally lower than fixed interest home loan. And, since it is a big-ticket credit, even a small difference can help you save a sizeable amount in the long run.

Contrary to the popular belief, even though the interest rate may change throughout the tenure, the EMI amount remains the same. When the market condition is shaky or bad, the interest rate tends to increase and you may end up paying more interest. This means a major portion of the EMI amount will go towards interest repayment and you may take longer to fully repay the principal amount.

Fixed rate or floating rate – Which is better?

So, now that you are aware of the difference between the fixed rate home loan and floating rate home loan, and know about their pros and cons, you may wonder which is better? Well, the truth is both are better in their own way, and the type of interest you choose mainly depends on your financial condition.

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