As we all know, home loans are available in two types of interest rates viz. fixed rate and floating rate. Once you have decided to take a loan for your dream home, there comes a question that should you opt for fixed or floating rate of interest. Definitely, both the options come with their own set of advantages and disadvantages. Let’s take a look at the detailed comparison between fixed rate and floating rate home loans.
Fixed Rate Home Loans
Fixed interest rate, as the name implies, allows repayment of loan in fixed equal instalments over the entire loan tenure. Irrespective of the market fluctuations, the interest rate remains fixed in this case. In the initial stage of the loan tenure, the monthly instalments are used to clear the interest, while the principal amount is set off with the instalments at the later stage.
Advantages of Fixed Rate Home Loans
- The foremost benefit that comes with fixed interest rate is, irrespective of market fluctuations, the borrower is expected to pay a fixed Equated Monthly Installment (EMI).
- It is great for people who are proficient in managing budget and want a fixed monthly repayment schedule, which is easy to finance and doesn’t change.
- Fixed interest rate also brings in a sense of security and certainty for the loan repayment.
Disadvantages of Fixed Rate Home Loans
- The key disadvantage of fixed rate home loan is that it is generally 1 to 2.5% more than the floating rate home loan.
- Respective to the market conditions, if the interest rate decreases, the fixed rate home loan will not be benefitted of reduced rates. Thus, the borrower has to pay off the same predetermined amount every month.
- Lastly the most crucial concern is to assess whether the fixed rate is actually fixed for the entire loan tenure or only for a few years. The market has many fixed rate home loans that can be changed after every few years. You should be careful about this while taking home loan.
As a sensible gesture, you must analyse the market conditions carefully. If the predictions signify increase in interest rates, then go for a fixed interest rate home loan. Else, go for a floating interest rate home loan.
Floating Rate Home Loan
Floating interest rate, as the name implies, offers a variable rate of interest as per the market conditions for the repayment of loan. With due respect to the market fluctuations, the borrower has to pay the monthly loan instalment as per the floating or variable rate in this case.
Advantages of Floating Rate Home Loan
- The major advantage of floating rate home loans is that they are usually cheaper than fixed rate home loans. For example, if you’re offered a floating interest rate of 11.5% while the fixed loan is available at 14%, you can save money even though the floating interest rate rises by 2.5%.
- Even if the floating rate goes beyond the fixed rate, it will be for some time and not for the entire loan tenure. Over a long period, the interest rates will definitely fall and therefore, the floating rate will let you save money as compared with fixed rate home loans.
Disadvantages of Floating Rate Home Loan
- The key disadvantage of floating rate home is its variable EMIs, which make it complicated for the borrower to budget. Many a times, it has been seen that with an increase in market interest rates, the borrower has to pay thousands of extra rupees per month in his EMIs which disturbs the entire budget.
As a matter of fact, more than 90% of borrowers opt for floating rate home loan considering that it will help them save money.
Now, considering the pros and cons of both fixed and floating interest rate home loans, it is finally up to the borrower to determine what is best suitable for him. It is worthwhile to compare home loans from different banks and institutions, considering all the parameters along with terms and conditions.