Which home loan interest rate type is best: fixed or floating
A home loan’s interest rate determines its affordability, so it is important that you pay attention to it. Apart from the home loan interest rates, consider the type of interest that you opt for. You can choose between a fixed-interest home loan and a floating-interest home loan. It is important that you understand the two options before making a choice.
Both fixed interest rates and floating interest rates have their pros and cons. Here’s a look at how the two differ.
What is a fixed interest rate
Fixed home loan interest rate is one where the rate does not fluctuate with changes in market forces. This rate remains steady throughout the tenor of the loan. When you opt for a fixed rate of interest, you can easily forecast your EMIs. Apart from that, since the rate remains steady, you can plan for home loan repayment with great ease as well. However, since this rate is constant, lenders usually charge you a slightly higher amount as compared to a floating interest rate home loan.
When should you opt for a fixed interest home loan
This type of home loan interest rate is ideal for you if the rate of interest at the time of taking the loan is low and you want to make the most of it. For example, if the rate was 12% a few years ago and has currently fallen to 10%, now would be a good time to borrow a loan with a fixed rate. Also, if you are uncomfortable with a constantly shifting interest rate, this option will offer more stability. Also, if you find that the interest rate results in more than 25–30% of your monthly income once you calculate the EMIs, you shouldn’t hesitate to opt for this rate.
What is a floating interest rate
Floating home loan interest rate is one that varies over the course of your loan’s tenor. When you opt for this rate of interest, you have to understand that you can’t predict EMIs with utmost certainty. The benefit of this rate of interest is that when rates drop, you will pay lower EMIs. On the other hand, when the interest rate rises, you will have to pay more towards your home loan.
However, in the event of the home loan interest rate rising repeatedly, you can request your lender for an extension in the tenor. Also remember that since the tenor of a home loan is usually lengthy, on the whole, the rise and fall in the interest rate evens out.
When should you opt for a floating interest home loan
If you are well-versed in the real estate market, choosing a floating-interest home loan is ideal. Also, if you’re expecting home loan rates to fall soon, choosing this option will prove to be beneficial. In addition, borrowing a floating interest home loan is beneficial as you do not have to pay any charges on part-prepayment or foreclosure as an individual borrower.
Time bound fixed interest rate
Determining which home loan is best, fixed or floating, depends entirely on your finances and outlook. However, bear in mind that most home loan providers have a combination of the two. This is known as the time-bound fixed interest rate. Here, for the first few years of the tenor, usually 3–5 years, the loan operates as a fixed interest rate loan. Thereafter, it turns into a floating interest rate home loan. As a result, you can enjoy the best of both options.