Home Loans: Fixed vs. Floating Rate of Interest

Updated on: 18 Jan 2024 // 4 min read // Home Loans
Author :(466 posts)

Once you start making sufficient money and enjoy a strong financial position, you might consider buying a home. Of course, an excellent monetary standing does not imply that you ought to have the entire money equal to the house’s value at hand. You merely need to have 15-20% of the home’s value, and for the rest, you can directly Apply for Home Loan.

You will need to repay the amount taken as loan, in the form of monthly instalments also known as equated monthly instalments (EMIs). The EMI will primarily depend on the principal loan amount, and on the interest rate. The rate of interest on a Home Loan can be broadly classified as Fixed Rates and Floating Rates. These terms may seem confusing at first, but with some fundamental knowledge, you will be able to understand the categories, as well as the nuances pertaining to each one of them. That being taken care of, it will become exceedingly simple for you to pick the one that, in the long run, will prove to be more beneficial for you.

So, without further ado, let’s us take you through each one of these types of interest rates.

HDFC Home Loan Offer

Fixed Interest Rate

As the name indicates, this type of interest rate implies that the loan will attract a pre-fixed percentage throughout its tenure. Hence, your EMI will remain the same, and completely unaffected by any fluctuations in the market. This will prove to be of help if you wish to remain certain of your upcoming financial commitments. However, with this type of interest, you might end up paying 1-2% point, in excess, as compared o the floating rate loan. That being said, if in future, the current interest rate increases, you may be at an advantage.

Why Opt for Fixed Interest Rate Loans?

You should go for a fixed interest loan if:

You feel more comfortable with certainty in your finances, and prefer paying a fixed EMI.

Your EMI is less than 30-40% of your total household income.

The prevailing interest rate is comparatively low, due to a recent decline. If you find the rate, apt to your expectations, you can opt to pay the same rate throughout your tenure.

You expect a rise in the interest rates in the foreseeable future and don’t want to pay the higher rate.

If there is speculation in the market, regarding an announcement from the Reserve Bank of India.

Floating Interest Rate

In this case, the rate of interest on your loan varies in accordance with the changes in the prevailing market rates. More often than not, this type of interest is levied in the form of a base rate, which remains constant, and a floating element, which fluctuates.

If you choose a floating rate, your EMI will primarily be divided into two parts – the principal amount and the floating interest rate. While the principal amount and the base rate will remain constant, the floating element may or may not change.

As can be easily understood, with this type of loan, it will become fairly difficult for you to plan long-term finances. In some cases, you may even be forced to pay a higher amount as EMI, than you can comfortably shell out, putting a strain on your financial health. However, you will benefit when the prevailing interest rates drop, or the Government or the apex bank announces any policies, offering relief to the borrowers of Home Loan. In the long run, it has been seen, that floating rate Home Loans often prove to be cheaper than their fixed-rate counterparts.

As a matter of fact, banks offer lower interest rates to customers opting for floating rate interest, as compared to those procuring fixed rate Home Loans. This puts the former at an added advantage.

Why Opt for Floating Interest Rate Loans?

You should go for a floating interest loan if:

You do not need to plan your finances to the last penny and are comfortable paying more or less than expected towards your EMI.

You have a flexible source of income, such as that in case of self-employed professional or business owner, and can manage to shell out a little extra than expected if the interest rates go up.

  • Your overall EMI outgo is less than 20-30% of your monthly household income.
  • You wish to save on the interest outgo in the long term.
  • The prevailing interest rates are expected to plunge in the near future.

You are not comfortable with the current rate of interest, and have sufficient understanding of the market to foresee whether or not, taking a floating rate interest will prove to be beneficial in the long run.

While you can choose from fixed rate and floating rate Home Loans, on the basis of your comfort level and financial goals, there is a third alternative as well. This is known as Time-Bound Fixed Rate. In this type of loan, your interest rate will be fixed for the first few, usually 3 to 5, years. This fixed rate will be determined by the bank and will be mentioned on your Home Loan agreement. Once this time is over, the loan will automatically get converted to a floating rate, wherein it will start fluctuating as per the market trends.

This loan is ideal for those who are new to the process of paying EMIs and need some time to get adjusted to the same. It gives them a sense of certainty, to begin with, and once they are accustomed to this commitment, they can go ahead to reap the benefits of the floating rate. This can prove to be a win-win situation for some.

Now that you are aware of the nuances of fixed as well as floating Home Loans interest rate, as well as time-bound fixed rate interest loans, make sure you pick the one that best suits your needs. When you do so, be confident in the decision you make, and ensure that you are mentally and financially prepared to honour your commitment through the tenure of your loan!