Jun 21, 2023

Floating & Fixed Interest Rates: Which is Better for Home Loans?

by Godrej Properties Limited

650

2

Purchasing a house comprises a series of decisions that can impact your way of life for a significant amount of time. The initial decision revolves around whether to rent or buy a house. If you have decided to buy a new abode, the next step is to find the ideal home for your family. Following that, the crucial decision of opting for a home loan interest rate fixed or floating arises. This decision significantly influences your financial situation and necessitates thoughtful deliberation. To assist you in making the right choice, here is a complete comparison that will help you understand the difference between fixed and floating interest rates.

What Are Floating Interest Rates In A Home Loan?

The floating rate of interest in a home loan refers to an interest rate structure where the rate can vary periodically based on market conditions and external benchmarks. The rate is typically linked to a benchmark rate, such as the prime rate or an index rate, and can fluctuate up or down as the benchmark changes. This means the borrower's monthly mortgage payments may increase or decrease over the loan term.

What Are Fixed Interest Rates In A Home Loan?

A fixed rate in a home loan refers to an interest rate that remains constant throughout the loan tenure. Regardless of any fluctuations in the market or changes in benchmark rates, the interest rate and subsequent monthly payments remain fixed, providing stability and predictability for the borrower. This allows borrowers to plan their finances accurately and provides protection against potential interest rate hikes in the future. 

Knowing the difference between home loan fixed or floating rates can help you make a prudent decision. 

Fixed Vs Floating Home Loan Interest Rate

In a scenario with a fixed interest rate, the interest rate remains consistent over the duration of the loan regardless of any fluctuations in the market conditions. Conversely, in a scenario with a floating interest rate home loan, the rate can rise or fall based on changes in the market.

Floating Interest Rates - Pros & Cons

Pros of floating interest rates

  • Lower initial interest rate
  • Flexibility to benefit from future rate decreases
  • Lower or no prepayment penalties
  • Potential for easier refinancing at lower rates

Cons of floating interest rates

  • Uncertainty of fluctuating payments
  • Risk of increasing interest rates
  • Potential financial strain if rates rise significantly
  • Lack of long-term stability compared to fixed rates

When should we use floating and fixed interest rates?

Here are a few things to consider while deciding between a home loan, floating vs fixed:

Consider a floating rate home loan if:

  • You anticipate a decrease in interest rates.
  • You are uncertain about the direction of interest rate movements.
  • You desire short-term interest cost savings.

Choose a fixed-rate home loan if:

  • You are comfortable with the committed EMI (Equated Monthly Instalment).
  • You expect interest rates to increase.
  • Interest rates have recently decreased, and you wish to secure a locked-in rate.

Fixed Interest Rates - Pros & Cons

Pros of fixed interest rates:

  • Stability and predictability in monthly payments.
  • Protection against potential rate increases.
  • Easier budgeting and financial planning.

Cons of fixed interest rates:

  • Potentially higher initial rates.
  • Limited flexibility to benefit from rate decreases.
  • Penalties for prepayment or refinancing.

     

Frequently asked questions

1.Which is better, a floating or fixed interest rate?

Ans: The choice between fixed vs floating interest rates depends on individual circumstances. Floating rates offer flexibility and potential savings, while fixed rates provide stability and protection against rate increases. Consider your financial goals and risk tolerance to make the best decision to know fixed or floating interest rate which is better for you. 

2. Is the floating rate the same as the fixed rate?

Ans: No, this is a difference between floating and fixed interest rates. Floating rates can change based on market conditions, while fixed rates remain constant throughout the loan term.

3. Why are floating interest rates higher than fixed?

Ans: Floating vs fixed interest rate home loans may differ. Floating interest rates can be initially higher than fixed rates because they offer flexibility and the potential for lower rates in the future, while fixed rates provide stability and protection against rate increases. 

It is important to know the difference between home loan floating vs fixed rates to make investment decisions that align with your goals. 

Previous Post
Next Post