What Interest Rate is Better: Floating or Fixed in Home Loans?
What Interest Rate is Better: Floating or Fixed in Home Loans?
Choosing between a fixed or floating interest rate for your home loan is important! Your choice can affect your monthly payments for a long time. It is like choosing between stability and changes in managing your money. With a floating rate, it can go up or down based on the market, while a fixed rate stays the same, giving you predictability and security.
This article aims to make these options easier to understand and show the pros and cons of floating and fixed interest rates on home loans. Let us now take you through the discussion of fixed vs floating interest rates in greater detail.
What is a Floating Interest Rate in Home Loans?
As its name implies, a floating interest rate indicates that the interest rate is not fixed and can vary with changes in the MCLR (in the case of housing loans taken from banks), or PLR (in case of HFCs or NBFCs). When you choose a home loan with a floating interest rate, it comprises a stable base rate plus a small window for the variable component. If the base rate experiences any changes, the interest rate will follow suit accordingly.
What is a Fixed Interest Rate in Home Loans?
A home loan featuring a fixed interest rate offers a complete departure from the floating rate alternative. In this scenario, the interest rate remains unchanged for the entirety of the loan's term. Furthermore, in the case of fixed interest loans, the initial Equated Monthly Instalment (EMI) payments are primarily directed towards servicing the loan's interest component, with a gradual shift towards repaying the principal balance in the later years.
Comparing Floating and Fixed Interest Rates in Home Loans
Here is a detailed comparison between floating and fixed interest rates in housing finance:
Aspects | Aspects | Fixed Interest Rates |
|---|---|---|
Stability | Fluctuates | Remains constant |
EMI | Can vary | Stays unchanged |
Risk | High risk | Low risk |
Term | Term | Ideal for short term |
Advantages and Disadvantages of Floating Interest Rate in Home Loans
Here are the pros and cons of floating interest rate in housing finance:
Advantages of Floating Interest Rate | Disadvantages of Floating Interest Rate |
|---|---|
One of the most significant advantages of opting for a floating interest rate is the flexibility it provides. When market interest rates decrease, your interest rate follows suit, leading to lower monthly payments and the potential to save money over the long term. | The primary drawback of floating interest rates is the inherent risk they carry. If market interest rates increase, your interest rate and monthly payments will rise as well. This unpredictability can introduce financial stress and uncertainty. |
EMIFloating interest rates often come with lower initial interest rates compared to fixed interest rate. This can make loans more accessible and more affordable at the outset, allowing you to get started on your financial endeavours with ease. | When the interest rate increases, the loan tenure increases and vice versa. This makes it unpredictable and impacts your overall interest outflow. |
Advantages and Disadvantages of Fixed Interest Rate in Home Loans
Here are some of the pros and cons of fixed interest rate in housing loans:
Advantages of Fixed Interest Rate | Disadvantages of Fixed Interest Rate |
|---|---|
With fixed interest rates, the primary advantage is the predictability they offer. You'll know precisely how much your monthly payments will be throughout the life of the loan. This stability can help you budget more effectively and plan for the future with confidence. | With fixed interest rates, the primary advantage is the predictability they offer. You'll know precisely how much your monthly payments will be throughout the life of the loan. This stability can help you budget more effectively and plan for the future with confidence. |
Fixed interest rates provide a protective shield against market fluctuations. Even if market interest rates rise, your interest rate remains constant, shielding you from overall interest outflow during loan tenure. | Fixed interest rates typically start with a higher initial interest rate compared to floating rates. This can result in higher initial monthly payments, which may be a deterrent for some borrowers. |
Factors to Consider When Choosing Between Floating and Fixed Interest Rates in Home Loans
There are a few factors that borrowers must keep in their minds before choosing between the floating and fixed interest rates. We have discussed a few of them in this section:
• Financial Goals: Your choice between a floating or fixed interest rate should align with your long-term financial goals. Consider whether you prioritize flexibility and potential savings or the stability and predictability of fixed payments.
• Market Trends: Current and anticipated market conditions play a crucial role in your decision. Research and analyse market trends to gauge whether interest rates are expected to rise or fall in the future.
• Risk Tolerance: Assess your comfort level with risk. If you're risk-averse and prefer predictable payments, a fixed interest rate might be the better choice. On the other hand, if you're comfortable with some level of risk and want the potential for lower payments, a floating rate might be more suitable.
Which Is Better: Fixed or Floating Interest Rate?
In conclusion, the decision between a floating and fixed interest rate is not one-size-fits-all; it's a decision that depends on your unique financial circumstances and priorities. Both options have their advantages and disadvantages, and the right choice for you will ultimately depend on your individual goals and appetite for risk.
Your financial journey is important to us, and we provide you with the tools and guidance needed to make the best choice for your financial well-being. Do not hesitate to reach out to Truhome Finance for expert advice and support as you navigate the waters of interest rate decisions.
FAQs
Here are some frequently asked questions on floating and fixed home loan interest rate:
1. Which interest rate offers more stability in EMIs?
Fixed interest rates are considered stable since they do not fluctuate based on market conditions unlike how floating rates.
2. Which interest rate is usually higher: fixed or floating?
The fixed interest rate is usually higher than the floating interest rate provided by a bank or non-banking financing company (NBFC).
3. Can I benefit from falling interest rates with a fixed rate?
No, fixed rates remain unchanged despite falling interest rates, limiting potential savings. Consider floating rates for greater flexibility.
4. What is the risk in a floating rate home loan?
The floating interest rate in a home loan may increase, increasing the borrower’s overall interest outflow.
5. Can we change the home loan interest rate from floating to fixed?
Yes, you can shift from floating to fixed interest rate and vice versa. However, you may have to pay a conversion fee which could impact your overall loan costs.
Table of content
- What Interest Rate is Better: Floating or Fixed in Home Loans?
- What is a Floating Interest Rate in Home Loans?
- What is a Fixed Interest Rate in Home Loans?
- Comparing Floating and Fixed Interest Rates in Home Loans
- Advantages and Disadvantages of Floating Interest Rate in Home Loans
- Advantages and Disadvantages of Fixed Interest Rate in Home Loans
- actors to Consider When Choosing Between Floating and Fixed Interest Rates in Home Loans
- Which Is Better: Fixed or Floating Interest Rate?
- FAQs
