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 not only affect your EMIs but also your 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 are fluctuating 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., highly impact floating rates. Moreover, these are reset by Reserve Bank of India at regular intervals.
If RBI’s repo rate is increased, there could be an increase in your home loan interest rate and vice versa.
Fixed Home Loan Interest Rate
Contrary to floating home loan interest rates, fixed interest rates are constant throughout the tenure. They remain unaffected by any internal or external factors, be it 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 interest 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 tenure, despite any changes in the market. You can avail 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. With a fixed rate housing loan, you can effectively plan your budget and finances. Moreover, you can avail 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 a floating rate of interest, 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. If you want a fixed EMI for the entire tenure, a fixed interest rate would be better. However, if you are unsure about interest movements throughout the tenure, you can opt for a floating interest rate. Moreover, often lenders allow you to switch interest rates for a nominal fee.