When availing a home loan, you have the option to choose between a fixed interest rate and a floating interest rate. The type of home loan interest rate you settle for plays a crucial role in determining your total loan cost as well as the repayment strategy. Below, go through some of the major differences between both these interest types. This will help you make a well-informed decision regarding which type of interest rate you should opt for.
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Fixed Interest Rate vs Floating Interest Rate
- A fixed interest rate is a type of interest rate that remains constant throughout your loan tenure and does not fluctuate even if there are any changes in the lending rates of banks or repo rates set by Reserve Bank of India (RBI).By opting for a fixed interest rate on your home loan, you will be able to ensure that your home loan EMIs remain constant throughout the tenure of the loan.
- Contrary to fixed interest rates, floating interest rates keep on changing as per the market conditions or trends. A floating interest rate depends on the base rate offered by the lenders. So, as the base rate changes, the interest rate gets automatically revised. As a floating interest rate is volatile, the home loan EMIs would also fluctuate as per the market dynamics. This can make financial planning while repaying the loan a little difficult.
Both these types of interest rates have their pros and cons, and you should make a choice as per your convenience. Below, go through some of the pros and cons of both fixed and floating interest rates.
Fixed Interest Rates: Pros and Cons
- Home loans are a long-term financial commitment. Opting for a fixed interest rate will provide you a better clarity about your monthly EMI outgo. This, in turn, can help you plan your monthly budget accurately and repay the loan amount without straining your finances.
- It is observed that the fixed interest rate loans are anywhere between 1 to 2.5% higher than the floating-interest rate loans. Additionally, most lenders offer fixed interest rates for a specified duration, thereby subjecting the borrower to floating market rates once the fixed rate period is over.
Floating Interest Rates: Pros and Cons
- Floating interest rates have gained more popularity as they are usually lower than fixed interest rates. Due to its volatile nature, even if the floating interest rate increases for some time, it won’t be the same for the remaining loan tenure. It’s likely that the floating rates might come down after a certain period of time.
- In case of floating interest rates, as the rate changes, your EMI will also change accordingly. Thus, if you have a fixed monthly budget, making EMI payments can sometimes be challenging.
Irrespective of the type of home loan interest rate you opt for, you must ensure timely repayment of the loan amount. Furthermore, to save on the total interest outgo of your home loan, consider pre-closing your loan. To get an estimate of the total interest outgo on your home loan, you can make use of a home loan interest calculator. Also, do not forget to take into consideration the prepayment charges for a fixed rate loan.