I am planning to take up a home loan. I am confused between fixed rate of interest and floating rate of interest. Which one is a better idea?
Good to know that you are taking up a home and doing some research before opting for fixed or floating rate of interest. You may be happy to know that you are not the only one facing this dilemma and a lot of home loan borrowers often get confused when resolving the fixed versus floating dilemma.
As a rule, fixed interest rates are usually 2-3% higher than the current floating interest rates and stay fixed for the entire tenure of the loan even if floating interest rates surge higher. In some fixed loans, there will be a cap and if the market rates are going up and crossing that limits, it will change. There is yet another type of loans which are called teaser loans. Teaser loans remains fixed for the first 3-4 years and there after become floating rate loan as per the current market rate at that time.
On the other hand, floating interest rate varies with the market and economic parameters depending on the banks base rate and RBI repo rate. With the Reserve Bank of India keeping an eye on the inflation figures and likelihood of improving economy it is likely that interest rates may come down even more in the near future.
You can make a decision after weighing the current market rates and after comparing it with the trend of rate fluctuations in the recent past. Anyhow, this is not a bad time to go for floating rates. Whichever you are choosing, make the decision only after reading the fine prints in detail
Every Home Loan aspirant has always been confused about choosing the right interest rate option for their loan. Lenders offer both fixed and floating interest rates. Since interest rates are the most important aspect of any loan, getting it right is the key to repaying without any financial stress or default over time.
Both fixed and floating interest rates have their benefits and disadvantages and the final selection must be done as per the convenience of the borrower. Fixed rate of interest on a loan would mean that the equated monthly installments or EMIs would remain constant over the tenure of the loan. On the other hand, for floating interest rates, the EMIs would fluctuate as per the market dynamics as the interest rate increases or decreases.
Advantages and Disadvantages of Fixed Interest Rates:
Since Home Loans come with a longer tenure compared to most other loans, a fixed interest rate brings a sense of clarity when it comes to loan repayment. People with fixed budgets can get a clear idea of their EMI obligations if they opt for a fixed interest rate loan.
The biggest disadvantage of such a setting is that the fixed interest rate loans are usually 1% to 2% higher than floating interest rate loans, depending on the lender. Lenders offer fixed interest rates for a limited number of years and not the full tenure, making the user susceptible to floating market rates once the fixed rate tenure period is over. So, read your loan agreement carefully before you proceed.
Advantages and Disadvantages of Floating Interest Rates:
A floating interest rate fluctuates with market economics and interest rates are linked to a base rate and a floating component. The base rate, now known as Marginal Cost of Lending Rate (MCLR), is decided by the bank concerned as per the quarterly base rate announcements of the Reserve Bank of India. Floating interest rates are usually lower than fixed interest rates although parameters like inflation and current account deficit are used in calculation of base rate by the RBI which can mean an uncertainty and different EMI for each repayment or installment for the loan.
It is best to choose a loan based on the present market scenario. Since interest rates are on a downtrend, floating rate loans make sense. However, some years down the line, interest rates might start rising. You could revisit your loan at that time.
Looking for a Home Loan? Click here to compare and apply.