<div>How To Choose Between Floating And Fixed Interest Rates</div>
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How To Choose Between Floating And Fixed Interest Rates

  • Highlights

  • In fixed rate, the interest rate is fixed throughout the tenure

  • In floating rate, the interest rate is affectedby market fluctuations

  • Floating interest rates are cheaper than fixed rate

  • Fixed rate helps you plan long-term finances in advance





Prospective homebuyers usually check numerous home loan options in the market before they zero in on a lender that suits their requirements. Among the many dilemmas they face while choosing a loan, the choice of opting between fixed interest rates and floating interest rates can be quite tricky.

It is imperative to consider both, weigh their pros and cons and then make an informed decision.

What is a fixed interest home loan?

A fixed interest rate home loan basically means the loan repayment will happen in equal installments throughout the given loan tenor. In other words, the interest levied on the amount you borrow will be constant, irrespective of the financial market fluctuations and policy change. Usually in such fixed interest loan scenarios, the principal is paid later and the initial EMIs are used for the repayment of the interest.

Additional Read: Did You Ask Your Lender About Your Home Loan Reset Clause

Pros

1. Constant / fixed interest throughout the tenure
2. With the interest independent of the fluctuations in the financial markets and policy change, the borrower can accurately budget their income and plan for the future
3. Fixed interest rate provides a sense of certainty for the repayment of the loan

Cons

1. Fixed interest rates are usually 1.5-2% higher than the floating interest rates. This is mainly to negate the fluctuations in the market over the loan period
2. In case of a decrease in the interest rate, the borrower still has to pay the fixed interest rate decided at the startbeginning of the loan.

What is a floating interest home loan?

This type of interest rate includes a base rate plus a floating component. This means that if the base rate changes, the floating rate will also vary.

Additional Read: Dos and Donts of Investing in Property for Great Returns

Pros

1. Floating interest rates, at the time of the loan initialization, will always be cheaper than the fixed rate, thereby saving money in the installments till the fluctuating interest rate goes above the fixed rate
2. In case of a further dip in the market, the fluctuating interest rates would still go down, thereby decreasing the EMI amount
3. If the floating interest rate rises above the fixed rate, it will be temporary, and not for the entire tenor of the loan

Cons

1. With the continuous fluctuation in the financial markets and the interest rates, it is very difficult to plan your finances for a long term
2. In case of market fluctuations, the borrower has to pay a higher interest than the beginning of the loan

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Making the right choice

To conclude, both fixed interest and floating interest rates come with their own set of risks and advantages. Choosing the type of interest rate is a personal choice. What works for one individual may not necessarily be the best choice for the other. A person who prefers to plan the expenses and finances well ahead of time, a fixed rate would be better suited. This, however, comes with a higher price. Before making a decision, a thorough research with respect to fixed or floating rates from different lenders should be considered.

Going through the finer details of the home loan, the conditions and repayment options which suits the need of the borrower precisely needs to be chosen.

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