Fixed rate vs. Floating rate home loan - Which home loan to choose?

Wed, 11/09/2022 - 04:46

Author: JLL


Home loan interest rates are significant and play pivotal role when purchasing a home. With a lower rate of interest, you can save your money or make an extra sizeable investment by managing your finances better. Therefore, before everything else it is important to know what kind of interest rate would meet your requirements. While the debate between the two-fixed home loan interest rate vs. floating home rate home interest rate continues, you lack detailed information ranging from why and how to choose your home loan interest rate plan to eligibility and repayment of the same. Here is your complete guide that will walk you through the process of determining the fixed rate vs. floating rate home loan.

What is Fixed Interest Rate or Fixed home loan?

Fixed interest rate loans come with a higher rate of interest. Yes, you read it right! Fixed interest rate loans cost you higher interest rates as they are not affected by the fluctuating graph of the economy. It predetermines your monthly EMIs with interest rates and helps you manage your finances better. Therefore, if you have a sound knowledge of the national and international economies and your economic forecast estimates to worsen the economy with a high inflation, and repo rate, then you can choose the fixed interest loan, which will save you a good amount on interest. It helps you make an effective budget plan that provides a sense of security regarding finances. The fixed interest rate is suitable for customers in their late 40s who are mostly debt-ridden and have a decent time to repay the loan before their retirement. This short-to-medium-term loan with less risk is the best way to plan your budget and finances.

What is Floating Interest Rate or Floating home loan?

The floating interest rate is highly volatile and continues to change according to the market scenario. Yes, the floating interest rate is based on the fluctuation of the financial graph, which makes it highly riskier when planning your budget and finances as the EMIs keep changing as per the interest rate. Since this form of interest rate depends upon the base rates provided by various lenders, the interest rate is immediately altered anytime the base rates change. Therefore, it is important to understand and estimate whether the financial or economic market will rise or fall. Based on your estimation, if the market falls, including the repo rate, choosing a floating home loan interest rate must be a good choice for your home loan. However, the interest rate on this loan is comparatively cheaper and usually provides 1%-2% less than the fixed interest rate. It is suitable for a long-term (20–30 year) home loan plan.

The fixed home loan benefits and floating home loan benefits vary. Now, even if you have chosen any of the plans, you get an opportunity to shift your interest rate plan from floating to fixed rate and vice-versa. However, the banks or financial institutions charge you a conversion fee of up to 2% on the total loan amount charged by the lender. In comparison to both, floating interest rates are gaining popularity amongst homebuyers. Financial institutions too, including banks and NBFCs, are providing floating interest rate loans at an attractive rate. With better understanding of financial market, you can make a better decision and reap the benefit of each making your finances work you in the future.