It is not easy to choose between a fixed and floating interest rate for your home loan in India, given the pros and cons of both. Below is a detailed guide that will help you make a decision on what type of interest rate will be most suitable for you as per your needs, goals and financial situation.
Fixed interest rates
Fixed as the name suggests are rates that don’t change at all throughout the loan period such that the borrowers get fixed Equated Monthly Instalment (EMIs) every month. It’s suitable for long term planning as you know with certainty what would be the monthly amount you’ll be paying.
But fixed rates will be 1% to 2.5% more than floating rates to compensate the lender for loan duration risk. Further, if the market rate declines, you’re going to pay the higher fixed rate for an even longer amount of time, which is always a part of the equation and can also be termed as a disadvantage of fixed interest rates.
Floating interest rates
Floating interest rates are rates that are market rate dependent and vary over time. Floating rates are lower than fixed interest rates and best suited when interest rates are anticipated to decrease or remain stable. Still, floating rates are: complicated and riskier to project. It is crucial to remember that the variation in market conditions may boost or decrease your EMIs. Floating rate loans, nevertheless, are also flexible, for instance, there is no prepayment fee, and hence you can settle your loan early without any extra cost.
How to select the best option?
Selection between fixed and floating interest rates should be done based on your budget and market conditions. You should select the fixed rate if you desire to have fixed EMIs and anticipate interest rates to go up. It allows you to pay a fixed monthly amount irrespective of what the markets do. This helps in reducing confusion and helps in clearly defined future planning.
On the other hand, you should opt for a floating rate if you think interest rates will decrease or have no idea where the markets are headed in the future. This is a strategy that saves you money on interest in the long term. It also helps in providing you with flexible interest rate options that are dynamic in nature and are dependent on the market. Interest rate on your home loan under floating rates changes based on the benchmark rate of the lender proportionate to market fluctuations.
Fixed interest rate option is good for individuals who are aiming to repay loans within a period of 3 to 10 years. On the other hand if you are looking to repay loans in the long run i.e., in 20 to 30 years then you should consider the floating interest rates option.
Hybrid loans
There are also blended loans with both fixed and floating interest rates available from some banks. In this, you lock in the rate for some amount of the loan at a fixed rate and get the balance as a floating rate. You can even shift between fixed and floating rates within the loan period by paying a nominal charge.
To put it simply, whether you should take fixed or floating interest rates on your home loan will depend on your risk tolerance and how you feel about the interest rate movement in the future. Equipped with what each of them has in store and what are the pros and cons of each, you can then proceed to make a choice that is best for your financial and risk tolerance position.
(Note: Raising a loan comes with its own risks. So, due caution is advised)
