Buying a home is a dream that we all wish to fulfil. Getting a home loan is one of the easiest ways to finance that dream. Even though it's a long-term commitment, affordable equated monthly instalments (EMIs) make it easier to own a home. The interest rate of a home loan is one of the most important factors to consider when looking for a home loan.
With the interest on a home loan, you have two options to choose from: a fixed interest rate and a floating interest rate. Let's learn more about these options so you can decide which suits your needs the best.
Interest rates are an important component for a borrower, as the right option can help avoid financial stress and lower the overall loan repayment amount. A fixed interest rate on a loan would mean that the EMIs would be fixed over the tenure of the loan, whereas in case of floating interest rate on a loan, the EMIs would fluctuate as per the changes in the interest rate.
A fixed interest rate is decided at the time of the sanctioning of the loan. Due to fixed rates, the EMIs are fixed which helps you in budgeting and paying an equal amount every month. It brings you clarity when it comes to loan repayment. The mortgage fixed rate doesn't change based on the changes in inflation rates.
Time-bound fixed rate is a fixed floating rate, where loan interest rates are fixed for a specific time and it auto-converts to floating interest rates.
If you have a constant and tight budget, paying the monthly instalments is easier as the EMI amount is fixed.
Fixed interest rates remain unchanged despite changes in RBI Repo Rates.
Unchanged interest rates provide stability and surety during loan repayment.
The tenure of the home loan does not change due to fixed interest rates.
Fixed interest rates may be a bit higher than floating interest rates.
You can't take advantage of a falling repo rate because the fixed rate doesn't change.
The fixed rate only lasts a specific duration of time, after which you may have to negotiate with your lender for another fixed rate.
Floating rates are subject to change
Also referred to as an adjustable rate or a variable rate, a floating interest rate means a rate that changes according to the changes in relevant economic rates. This means that the rate of interest will vary during the loan tenure and the EMIs would also fluctuate likewise. Factors like the rate of inflation, monetary policies or a change in RBI's Repo Rate, affect the rate of interest that will be applicable at a specific time.
Floating home loan interest rates are adjusted on a periodic (quarterly, half-yearly or annually) basis depending upon the terms and conditions of the loan.
Interest rates get adjusted periodically based on the nature of a loan.
Incentives or festive bonuses can be used for the prepayment of a loan without any penalty.
As it is linked with the repo rates, they enjoy the benefits of the interest rate cycle.
Floating interest rates may be slightly cheaper than fixed interest rates.
A floating home loan interest rate is unpredictable, as it keeps on changing based on the interest rate cycle.
It may become inconvenient if you have a lesser risk appetite and lesser knowledge regarding the market change.
You can end up paying higher interest during unfavourable market conditions.
It's difficult for planning a budget as the EMI keeps on changing irrespective of interest rate changes.
Choosing the right rate can help you save in the long run
People who follow budgeting and are willing to pay a fixed percentage of the premium of their income can opt for a fixed interest rate, which can lead to higher interest payments irrespective of floating interest rates.
Borrowers who are in their 40s or more might benefit more from fixed rather than floating rates as they may have more priorities, want to be secured and may not be too excited about any surprises. Whereas a floating rate may be more suitable for younger borrowers in their 20s. They tend to have a greater risk appetite and may adapt to the changes better as they may have fewer priorities.
It remains fixed throughout the loan
It keeps on changing as per the benchmark rate (repo rate)
A Prepayment penalty will be charged
No prepayment penalty
When to choose
When the repo rate is going to increase
When the repo rate is going to fall
Term of loan
It doesn't change
Ease of budgeting
It becomes easy as you have to pay a fixed EMI
It becomes hard as the EMI keeps on changing due to interest rates
By weighing the advantages, disadvantages, and key factors associated with fixed and floating interest rates, you can make a more informed decision about your home loan. Remember, there is no one-size-fits-all solution. By analysing your financial situation and considering the factors outlined in this blog post, you'll be better equipped to determine whether a fixed or floating rate of interest is the right path for you.
At IIFL Home Loans, we aim to help you make decisions that are the best for you. We strive to bring affordable housing options to you so you can be equipped to own the home of your dreams. Apply online now with IIFL Home Loans, and take a step closer to your dream home.
Fixed interest rates are the rates that are fixed and do not change due to interest rate (Repo rate).
Floating interest rates are the rates that float, which means they keep on changing due to interest rates (Repo rates).
In the Floating rate, interest rates, EMIs and loan tenure keep on changing based on the economic conditions.
As there is no prepayment penalty on floating interest rates. But if you have to prepay on a fixed rate you have to pay a prepayment penalty.
As per the current market trend, it's believed that repo rates (interest rates) are going to fall for 2-3 years, meaning floating rates will be beneficial.
Disclaimer: The information contained in this post is for general information purposes only. IIFL Home Finance Limited (including its associates and affiliates) ("the Company") assumes no liability or responsibility for any errors or omissions in the contents of this post and under no circumstances shall the Company be liable for any damage, loss, injury or disappointment, etc. suffered by any reader. All information in this post is provided "as is", with no guarantee of completeness, accuracy, timeliness, or of the results, etc. obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability, and fitness for a particular purpose. Given the changing nature of laws, rules, and regulations, there may be delays, omissions, or inaccuracies in the information contained in this post. The information on this post is provided with the understanding that the Company is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. This post may contain views and opinions which are those of the authors and do not necessarily reflect the official policy or position of any other agency or organization. This post may also contain links to external websites that are not provided or maintained by or in any way affiliated with the Company and the Company does not guarantee the accuracy, relevance, timeliness, or completeness of any information on these external websites. Any/ all (Home/ Loan Against Property/ Secured Business Loan/ Balance Transfer/ Home Improvement Loan/ NRI Home Loan/ Home Loan for Uniformed Services) loan product specifications and information that may be stated in this post are subject to change from time to time, readers are advised to reach out to the Company for current specifications of the said (Home/ Loan Against Property/ Secured Business Loan/ Balance Transfer/ Home Improvement Loan/ NRI Home Loan/ Home Loan for Uniformed Services) loan.