The home loan interest rate you choose has a significant impact on your EMI and total repayment amount. The type of interest rate you choose can also affect your overall cost of borrowing. The choice between fixed and floating interest rates will affect your EMIs and repayment strategy.
Go through the details below to know more about both types of home loan interest rates and which one would be better for you.
Floating Home Loan Interest Rate
Floating interest rates fluctuate throughout the tenure. They are not constant and are highly affected by the market rates. Factors like market trends, socio-political changes, economic policies, etc., favorably impact floating rates. Moreover, these are reset by the Reserve Bank of India at regular intervals.
If RBI’s repo rate increases, there could be an increase in your home loan interest rate and vice versa.
Fixed Home Loan Interest Rate
Unlike floating home loan interest rates, fixed interest rates are constant throughout the tenure. They remain unaffected by internal or external factors, economic policies, or market fluctuations. However, nowadays, lenders do not offer fixed rate interest. Even if they do, they are changed into floating after a few years. Also, fixed home loan interest rates are usually 1.5-2% higher than the floating rate.
Which Is Better? Floating or Fixed?
- Fixed interest rates are constant for the entire tenure. It means that your EMI would remain the same throughout the assignment, despite any changes in the market. You can avail of a fixed interest rate housing loan if you want the same home loan EMI for the entire tenure and want stability in the monthly expenditure. You can effectively plan your budget and finances with a fixed-rate housing loan. Moreover, you can avail of a loan when the interest rate is low and lock it for the entire tenure.
- The floating interest rate is highly affected by market fluctuations and government policies. However, it is usually lower than fixed interest rate home loans and so comparatively cheaper and economical. In addition, floating interest rates are subject to changes and help you save when there is a drop in the repo rate. You can choose a floating interest rate home loan when you expect the repo rate to fall and its subsequent effect on the home loan interest rate. Also, if you plan to prepay your loan, it would be best to avail of a floating interest rate, as there are no prepayment charges on the floating interest rate housing loans.
Both floating and fixed interest rates have their own set of benefits and challenges. Therefore, it is crucial to identify your needs while choosing between the two. A fixed interest rate would be better if you want a fixed EMI for the entire tenure. However, if you are unsure about interest movements throughout the term, you can opt for a floating interest rate. Moreover, lenders often allow you to switch interest rates for a nominal fee.