Floating versus Fixed Interest Rate Home Loan – Which is better
When you are applying for a Home Loan, you would have come across terms like floating and fixed interest rate. Each has its own advantages but what kind of interest should one choose? Let’s get to know which one is better.
Buying a home is definitely a tiring process. Right from searching for the perfect dream home, to the endless documentation; in all this, the most significant step is the application of a home loan. While you may be struggling to get the maximum house value covered with the loan, the confusion to choose between floating or a fixed interest rate is yet another challenge that you have to deal with. Customers often find it difficult to choose between Home Loan Floating or a Fixed Interest Rate.
Fixed Interest Rate:
As the name suggests, the interest rate remains fixed for the entire Home Loan tenure. The advantage of choosing a fixed rate is that you are certain about your loan repayment amount, which needs to be made every month. It helps you to plan your finances, accordingly.
When should you actually opt for a Fixed Interest Rate?
- You are comfortable with the EMIs you have agreed to pay every month. Ideally, the monthly instalment does not exceed <20-30>% of your monthly income
- You do not have to worry about market conditions, as the rate is not affected by external factors.
Floating Interest Rate:
Floating rate loans are quite popular due to the flexibility they offer the borrowers. These are adjustable rates that move in sync with the market rate fluctuations. The rate on Home Loans is reset at specific intervals. In such circumstances, the tenure of the loan gets re-adjusted. For instance, if the rate of interest increases, the loan tenure also gets extended and vice-versa.
When should you opt for a Floating Interest Rate?
- If you have good knowledge about the ups and downs in the market, it is quite beneficial to pick a floating rate on the Home Loan
- If you are expecting the interest rate on a Home Loan to fall in the coming months, you can opt for a floating rate, thus enjoying the lower rate as well as reducing the overall cost of the Home Loan
- Floating rate loans have no prepayment penalty. For instance, if you have received a festive bonus or incentive, you can use the amount to prepay the loan and there will be no penalty.
Which is better – A Fixed or Floating Interest Rate?
Now the big question is, which one should you choose – a floating or fixed interest rate home loan? While both have their advantages, it isn’t possible to predict future rates if you choose a floating interest rate on your Home Loan. In case the rate becomes high, it can be an unfavourable situation for you. But you need not worry, as it is possible to shift from a fixed to a floating rate and vice versa at any point in time. However, you need to pay a small fee for making the switch. Every individual’s financial profile and needs are different; hence it is tough to conclude which one is better.
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