Fixed or floating home loan: The right choice matters!

A home loan is a tool that benefits innumerable buyers. When managed efficiently, it works out to be the biggest facilitator towards the aspirations of owning our dream houses. However, most buyers are confused about which type of loan they should opt for: the ones offering a fixed rate of interest or the ones with the floating rate of interest. The final choice not only affects the EMI outgo but also the entire repayment plan. Let us enumerate the basic difference between the two and how each one aids the buyer.

The difference

In a nutshell, a fixed home loan is one in which the rate of interest is constant for the entire tenure of the loan. In other words, it signifies a known cash outflow for a fixed period. Although usually priced slightly higher than floating home loans, fixed loans offer a sense of certainty to the buyers since they are aware of the repayment amount for the entire period of the loan. This allows them to plan their finances better.

In the case of a home loan with a floating rate of interest (also referred to as adjustable-rate home loans), the interest rate usually changes at specified intervals as per market interest rates over the tenure of the loan. In most cases, the period of the home loan is re-adjusted to account for the change in interest rates. However, if the buyer so desires, he may request the lender to alter the EMI instead of the loan tenure.

Which home loan should you opt for?

Buyers usually go for a fixed home loan when:

  • They are comfortable with the EMI they are committed to paying for the entire length of the loan. According to industry experts, this EMI usually should not exceed 25-30% of their total income.
  • They predict the rate of interest to shoot up in the future.
  • When the rate of interest has come down recently, which they are comfortable in paying.

A floating home loan works out to be a viable option for the buyers when:

  • They expect home loan interest rates to dip over time. Opting for a floating rate under these circumstances will result in the rate of interest falling for the particular loan, thereby reducing the cost of the entire loan.
  • When they are unsure about interest rate movements and would prefer to stick with market rates.
  • When they want to avail benefits based on the fact that floating home interest rates are usually a tad lower than fixed home loans.

If you are still not sure which one is the best for you…

In such a scenario, buyers can opt for flexibility through a loan that is partly fixed and partly floating. This is especially favourable for buyers who have other loan commitments currently – in such cases, they can avail of a fixed rate of interest for a few years and then switch over to a floating rate for the remaining period of the loan. All major lenders anyway always provide the option to switch between the fixed and floating rates of interest at any point of time, after charging a nominal fee for the switch.

At the end of the day, the type of loan a home buyer chooses will entirely depend on his needs, preferences, discretion and financial strength.

FIXED VERSUS FLOATING INTEREST RATE

FIXEDFLOATING
The interest rate on your home loan remains fixed throughout the loan tenure.The interest rate on your home loan changes based on a change in the lender’s benchmark rate.
Fixed rates are slightly higher than floating rates.Floating rates are slightly lower than fixed rates.
If you are comfortable with the prevailing interest rates, are reasonably sure
that interest rates will rise
in future, opt for a fixed-rate home loan.
If you are unsure about where interest rates are heading, opt for a floating rate home loan.
There is a prepayment penalty in the case of fixed-rate home loans.There is no prepayment penalty in the case of floating rate home loans.

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