Home Loan Interest Rates: Fixed or Floating – Which One is Better?

Getting a home loan has become very easy nowadays. However, it involves a series of decision which can have an impact on your life for years or even decades. The first and foremost thing that will bother you is whether to go for a fixed interest rate or floating Home Loan interest rate. Let us see which option is better.

Fixed interest rate:

Fixed interest rate means repayment of home loans in fixed equal installments throughout the loan tenure. In this case, the interest rate does not change with market fluctuations. The majority of monthly installments during the early part of the loan tenure are used to service the interest while the principal is served in the later parts of the tenure.

Advantages of fixed interest rate:

  • Irrespective of the market conditions, the interest rate remains fixed.
  • This type of option is good for those who are good at budgeting and want a fixed repayment schedule.
  • It brings a sense of clarity and certainty.
Disadvantages of fixed interest rate:

  • One of the major disadvantages of fixed interest rates is that it is usually 0.5-2.5% points higher than the floating rate home loan.
  • If for any reason, the interest rate decreases, the fixed rate home loan doesn’t get the benefit of reduced rates and you will have to pay the same amount every month.

Precautions to take before availing this type of loan:

You must always cross-check with the bank whether the fixed rate home loan is fixed for the entire tenure or only for a few years. Experts agree on the fact that fixed rates are a better option if the economic scenario promises a rise in interest rates in the near future.

Floating interest rate:

Floating interest rate implies that the rate of interest fluctuates with market conditions. Floating interest rates are tied to an MCLR rate and a floating element. So, if the MCLR rate changes, the floating interest rate also changes.

Advantages of floating interest rate:

  • It is cheaper than the fixed interest rates.
  • Even if the floating rates go over the fixed rates, it will be for some time and not for the entire loan tenure. The interest rates will definitely fall over a long period and, thus, it will bring a lot of savings in terms of the amount of repayment.

Disadvantages of floating interest rate:

  • Monthly installments are uneven making it difficult to budget.
  • Customers benefit by choosing a floating rate home loan if the interest rate does not exceed 11.5%.

Semi-fixed interest rates:

In this kind of loan, the interest rate remains fixed for the first few years and then it changes to a floating rate. Hence, you can be sure about the EMI amount for the initial years, and choose the loan amount and tenure accordingly.

Which one should you choose?

The type of interest rate you choose depends on several factors. Fixed interest rate gives you a clear idea about how much you need to pay every month. It lets you plan your budget accordingly and you avoid risks in the form of EMI fluctuations and the chance of having to pay higher interest. But in such cases, you also miss out on the chance of lowering your EMI if the interest rate decreases.

In a semi-fixed rate, your EMI remains fixed for a few years and then fluctuates as the rate changes to floating rate. This might be beneficial for those who expect their income to rise in the nearby future but want the safety of a steady Home Loan EMI Calculator for the first few years.

So, if you expect interest rates to increase in the future, you should opt for a fixed interest rate home loan to lock-in the interest rate at the current lower rate of interest. If rates have been on the rise over the past few years and the prediction is for a fall in loan interest rates soon, then you must opt for the floating interest rate to reap the benefits. If you expect the rate to go up and then decrease after a few years, opt for a semi-fixed interest rate.