Jun 21, 2023

Floating Interest Rate on Home Loan: Benefits & Limitations

by Godrej Properties Limited

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Buying a home is one of the most significant financial decisions in one’s life. There are certain factors like location, down payment, loan amount, and tenure that require careful consideration. Among these, the choice between fixed and floating interest rates is crucial. This article will help you understand a floating interest rate and how opting for a floating interest rate home loan will impact your home-buying journey.

What Is The Floating Interest Rate On A Home Loan?

floating home loan means that it keeps on changing from time to time. Opting for a floating interest rate on your home loan means paying a base rate, typically low, with an additional floating component. The base rate represents the minimum or benchmark rate established by the lenders, and they cannot offer loans below this rate. Consequently, any changes to the base rate result in corresponding fluctuations in the floating rate.

Reasons To Choose A Floating Interest Rate On Your Home Loan

Here are some reasons to consider opting for a floating-rate home loan:

  • Forecasting Market Conditions: If you expect a future fall in home loan interest rates, a floating rate may be favorable.
  • Savings Potential: Floating interest rates are typically 1%-2.5% lower than fixed rates given by the same institution.
  • Unexpected Gains: Borrowers that choose variable interest rates gain from market volatility. If market rates fall below the base rate, your loan's interest rate will be lower than fixed rates. This enables investors to profit from favorable economic conditions while assuming little risk and reaping unexpected future rewards.

Advantages And Disadvantages Of Floating Interest

Here are some advantages of opting housing loan with floating interest rates:

  • Lower Interest RatesFloating rates of interest on home loans are generally cheaper compared to fixed rates, allowing borrowers to save money.
  • Potential Savings: Even if the rate of interest for home loans increases due to market fluctuations, borrowers can still benefit from initial savings if the starting rate is lower than the fixed rate.
  • Temporary Market Volatility: While floating rates may temporarily exceed fixed rates during volatile market conditions, the impact is limited to a certain period and does not affect the entire loan tenure.
  • The following are some disadvantages of opting for floating interest rates:
  • Varying EMIs: Monthly instalment amounts fluctuate with floating rates, making it necessary to predict and manage varying payment amounts.
  • Challenging Budgeting: Planning a monthly budget becomes difficult as EMIs are not fixed with floating rates, potentially affecting financial planning.
  • Affordability Concerns: In certain instances, the EMI amount may exceed what borrowers can comfortably pay, impacting savings and financial stability.
  • Market Dependency: Floating rates are influenced by unpredictable and dynamic market conditions, posing a risk of unaffordable interest rate increases that could lead to default and damage credit scores.

Floating Rate of Interest on Home Loans 2023

The average floating interest rates on home loans offered by major banks in India range from approximately 6.95% p.a. to 8.05% p.a. However, it is important to note that these rates are subject to change and may vary depending on factors such as the borrower's creditworthiness, loan amount, and the specific terms and conditions of the lending institution. 

 

Frequently asked questions

1. Is a floating loan good or bad?

Ans: The suitability of a floating-rate housing loan depends on individual circumstances and market conditions. It can be beneficial if interest rates decrease but carries the risk of higher payments if rates rise.

2. How is floating interest calculated?

Ans: Floating interest rates are typically calculated by adding a spread or margin to a benchmark rate, such as the MCLR or the Repo Rate. The total rate is determined periodically based on the changes in the benchmark rate.

3. How to calculate a floating-rate home loan?

Ans: To calculate a floating rate home loan, determine the benchmark rate (e.g., MCLR) and the spread/margin set by the lender. Add the spread to the benchmark rate to get the floating interest rate applicable to your loan.

4. How is EMI calculated for floating interest rates?

Ans: To calculate the EMI for a floating interest rate, you need to know the loan amount, the floating interest rate, and the loan tenure. You can then use a standard EMI calculation formula or an online EMI calculator to determine the monthly installment.

5. What is the duration of a floating-rate loan?

Ans: The duration or tenure of a floating rate loan varies and is typically agreed upon between the borrower and the lender. It can range from a few years to several decades, depending on the loan agreement and borrower's preferences. 

We hope that this information will help you understand the floating interest rate meaning, which will help you in making informed decisions that align with your financial goals. 

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