Should I Pick a Fixed or Floating Rate of Interest When Applying for a Home Loan?
If you’re applying for a Home Loan, you must know that Home Loans come with two types of interest rates – Fixed and Floating/Variable. If you’re new to this concept, you must read how a fixed interest rate Home Loan is different from a floating Interest Rate Home Loan and which one you should opt for.
Fixed Interest Concept:
The phrase suggests that the rate of interest is fixed throughout the tenure of the loan. This entails that you have to pay the same EMI (Equated Monthly Instalment) right until the loan is fully paid down. The rate of interest does not change. This is advantageous for Home Loan borrowers who wish to have stability in their repayments. The fixed rate does not depend on market fluctuations and hence it remains static.
The major disadvantage is that these rates are at least 1% to 1.25% higher than the floating rate. As a result, you will be unable to take advantage of a lower interest rate if the RBI (Reserve Bank of India) starts cutting rates.
Some banks give a fixed interest rate for the first few years and then reset to a floating rate so make sure to read the fine print.
• The EMI remains fixed throughout the tenure of the loan.
• These rates do not fluctuate according to market trends.
• The fixed rates of interest are higher than the floating rates
• Since fixed rates do not fluctuate, you will not get any advantage if lending rates become lower.
Floating Interest Concept:
This rate of interest changes with market trends. Floating rates of interest are linked to the base rate of the bank. Therefore, the rate of interest changes as and when the base rate of the bank changes.
One of the biggest advantages is that these are lower than fixed interest rates. The floating rate entails that the EMI payable on Home Loans does not remain constant. Floating rate EMIs are initially lower than fixed rate EMIs.
• Floating rates fluctuate according to market trends. Hence, you stand to gain if the trend is on the downward slide.
• The floating rates are usually 1% to 1.25% lower than the fixed interest rates.
• Your EMIs can vary because of the changes in the rates of interest. It can fluctuate, hence you cannot be sure of the total outflow.
• When rates increase, your EMIs can go up as well. This can cause financial strain as you could find it difficult to make alterations at short notice.
The Flexible Rate Scenario
Banks have formulated Home Loan structures where rate of interest is fixed for a certain period. The banks have the option to reset the rates at the end of the specified period. Thus, giving the customers an option to switch to floating rates when needed.
Which of these would work better for you?
Floating rates are better in a scenario where the market tends to fluctuate. Floating rates are linked to the base rate of the bank. The rates change as and when the bank rates change. In a market scenario when rates go down, the base rate takes a beating as well. This proves advantageous to Home Loan borrowers who avail floating rates.
On the other hand, the fixed rates are better when the market trends are on the upswing. The base rates go up and so do the floating rates. The advantage of having fixed rates is that these rates do not fluctuate. Hence, you stand to hand to gain under the circumstances.
If you wish to have steady EMIs throughout the tenure of the loan, you can opt for a fixed rate of interest. Otherwise, the floating rate is always preferable, especially in the current market scenario where rates are on a downward slide worldwide.
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