Purchasing a home is a significant financial decision that is made by a family or an individual. To support this purchase, individuals may choose to apply for home loans. While applying, the borrowers have to choose between fixed and floating interest rates. Knowing the structure, repayment pattern, and cost implications of both these interest types can help individuals make informed borrowing decisions. This article explains both these types and highlights the key differences between them.
Table of Contents
What is a Fixed Home Loan?
A fixed home loan in India is a loan in which the interest rate remains the same throughout the tenure of the loan. This means that your EMI remains the same even if the interest rate in the market increases or decreases. For this reason, borrowers may find fixed rates favourable. It adds an aspect of predictability in repayment, making financial planning simpler. However, compared to floating rates, the fixed interest rate may be higher. Borrowers must therefore check terms related to interest rates before agreeing to the loan’s conditions.
What is a Floating Home Loan?
In a floating home loan, the applicable interest rates change throughout the loan’s tenure. This is because it is linked to external benchmarks such as the Reserve Bank of India’s repo rate. When these benchmarks change, the interest rate of the loan also changes. Due to this, the EMI amount can increase or decrease on a month-to-month basis. They can be higher or lower than fixed interest rates and may introduce an element of uncertainty to your long-term repayment planning.
Understanding the Key Differences Between Fixed and Floating Rates
Knowing the core differences between fixed and floating rates is necessary to choose the one that aligns with your repayment capacity.
| Fixed Rates | Floating Rates |
| The EMIs remain constant throughout the tenure. | The EMIs may fluctuate with market rates |
| They provide stability and easy budgeting | They offer flexibility but reduced predictability |
| The rates may be higher, resulting in higher EMIs | May begin with lower rates but can rise with market conditions. |
| It is unaffected by the repo rate or fluctuations in the market rate | It is directly linked to the repo rate and thus is affected by fluctuations |
| Unless the tenure is restructured manually, it remains fixed | The lender may adjust tenure automatically to balance EMI changes. |
| May be preferred by salaried individuals | May be preferred by borrowers aiming to benefit from possible lower rates |
What are the Advantages of Fixed Home Loans?
The borrowers who want to prioritise stability may choose fixed loans. The other advantages of a fixed home loan are as follows.
- Predictable EMIs: The constant repayment amounts help in financial planning
- No Effect of Market Volatility: Changes in the repo rate do not impact the total cost of the loan.
- Preferably for Short-Term Borrowers: If the borrower plans to repay the loan amount within a short term, fixed rates can be chosen over floating terms.
What are the Advantages of Floating Home Loans?
Borrowers who want to benefit from possible lower rates and uncertain payments may prefer floating home loans. Other advantages of floating home loans are as follows.
- Affordable Rates During the Initial Stage: In the beginning, floating rates may be affordable than fixed rates.
- Benefit from Rate Reduction: If the interest rates reduce further, your EMIs or your loan tenure may be reduced.
- Common Option: Lenders may prefer to offer floating rates, making them widely available.
What are the Limitations of Fixed and Floating Rates?
Considering the limitations of both fixed and floating rates is important to choose the right type of interest rate.
- Fixed Loan: The rates may be high at the beginning of the tenure. However, the lender may allow you to convert them to floating.
- Floating Loan: The EMIs can be uncertain, along with the potential of an increase in the total loan cost during high-interest cycles, while having limited control over tenure adjustments.
Things to Keep in Mind While Choosing the Right Loan
While choosing the right type of loan, you should also consider the following:
- If you are expecting a bonus or surplus income, make sure to check the prepayment rules for both types of loans.
- If you have chosen floating rates, staying updated about the economic cycles can help you make informed choices.
Conclusion
Both fixed and floating interest rates have their advantages and limitations. Fixed rates provide stability, while floating rates may offer flexibility that aligns with the market changes. Since a home loan repayment is a long-term commitment, understanding the core differences of these interest rate types is essential. Furthermore, assessing your repayment capacity and long-term financial plans is necessary for making the right loan type choice.