Fixed vs Floating rate of interest – What suits you the best

Fixed vs Floating rate of interest – What suits you the best

A home purchase is probably the biggest financial decision and transaction in a person’s financial life. It is a decision that has an impact for many years to come. It is also a transaction that requires planning around your income outflow for many years to come.

A home loan is a prolonged financial commitment that typically stretches for 20 to 30 years during which time, interest rates can change, depending on the economic environment of our country. Considering this, home loan providers give you two options with regard to interest rates. One is the fixed rate and the other is the floating rate.

As evident from their names, the fixed rate loan comes at a per-specified interest rate for a certain period, after which it is repayable at a floating rate; in the case of a floating rate loan, the rate can vary throughout the loan tenure as it is tied to a reference interest rate which changes based on economic compulsions. Each has its own attributes and either can be chosen based on your requirement.

Here’s a look:

Fixed rate home loan

  • Safety from Fluctuations for a predetermined period of time: There could be instances when economic conditions result in an increase in interest rates in general. Opting for a fixed rate gives you a shield against such fluctuations initially and you will be paying a fixed amount of EMI each month during the fixed term. However, after the fixed term is over, your rate of interest will move to a floating plan, e.g., if you have opted for a 5-year fixed term plan, then from the 6th year onwards, your home loan will be subject to the current floating rate of interest. So during the time your interest is fixed, you do not have to keep watching over your shoulders to see where the interest rates are headed

Floating Rate Home Loan

  • Marginally cheaper: Floating rate loans generally carry a slightly lower rate of interest since there is a fluctuation dependency on economic conditions like inflation or growth factor etc. The lender hikes or reduces the rate based on the market conditions. So a floating rate can turn out to be most beneficial during low inflation period.
  • Lower EMI when rates fall: If interest rates remain static or are on a downward trend, you could save money in a floating rate loan as you benefit from the fall in interest rates.

In a nutshell:

The type of loan you should go in for depends on your needs. It’s up to the borrower to decide what to opt for based on what suits him/her the best. If your foremost concern is safety and certainty, you may opt for a fixed rate of interest at the cost of some interest rate premium or otherwise.

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