A home loan interest rate can significantly affect your EMI and its affordability. Therefore, it’s crucial to understand the differences between a fixed and variable home loan to know which one can be best suited for you. Keep reading to know the key
New Delhi (India), January 10: A home loan interest rate can significantly affect your EMI and its affordability. Therefore, it’s crucial to understand the differences between a fixed and variable home loan to know which one can be best suited for you. Keep reading to know the key differences.
One of the best ways to purchase a home is by taking a home loan. It can help you realise your long-term financial goal of owning your dream home without stretching your finances, as you can own the home now and pay off the debt gradually.
However, aspiring homeowners should consider the key elements of a home loan before taking one. One thing that surely deserves your attention is the type of interest rates you opt for.
You can choose from two types of home loans - Floating vs Fixed interest. It’s vital to understand the difference between floating vs fixed interest rates in a home loan to know which one can be more suitable for you.
The best way to compare floating vs fixed interest rate home loans is by knowing what they are and the benefits each offers to the borrower.
A fixed-rate home loan is one where the interest rate is fixed at the beginning of the home loan and remains the same during the entire loan repayment tenure. Although a fixed-interest-rate home loan can have slightly higher interest rates than a floating-rate home loan, it can provide greater stability during the loan repayment tenure.
A fixed-interest-rate home loan can be a good option for the following reason.
A fixed-rate home loan remains unaffected by the change in interest rates.
The borrowers can make a long-term financial plan as they know the exact EMI amount they need to provision for during the fixed-rate home loan period right at the beginning of the loan repayment tenure. As a result, it can be easier to maintain financial stability with a fixed-interest-rate home loan.
The tenure of the home loan remains unchanged as the interest amount remains the same.
Therefore, you can consider taking a fixed-interest-rate home loan in the following situation:
You think that home loan interest rates will likely increase in the future. So, in that case, you would take a fixed-rate home loan to lock in the current interest rates.
You think the existing fixed interest rate for a home loan is quite cheap, and then you would prefer paying off your loan at this rate.
You are unsure about interest rate movements. Then you would rather pay a fixed EMI for the entire loan repayment tenure. Say your salary rises in the future, and the EMI for your fixed-interest-rate home loan might become a lesser part of your monthly expenditure.
You don’t plan to pre-pay the home loan in part or in full, and then a fixed-rate home loan would definitely be a good bet.
A floating-rate home loan is one where the interest rate can vary during the loan repayment tenure. This is because the floating rate of interest in a home loan can vary depending on the market volatilities or the increase or decrease of the lender’s benchmark rates. These are also known as adjustable-rate home loans or variable home loans.
Some of the important features of a floating-rate home loan are
The interest rates can get adjusted at specific intervals, like quarterly or annually.
The loan disbursement date can affect the borrower's interest rates.
The lender may adjust your interest rates depending on the agreed-upon terms and conditions. For instance, some lenders adjust the interest rates on the completion of an annual loan repayment period.
You can pre-pay the home loan in part or full without attracting any penalty.
The lender reserves the right to alter the interest rate cycle as per the norms.
Your EMI amount usually remains unchanged in the event of changes in interest rates. Only the loan repayment tenure changes. So, if the interest rates decrease, then your loan repayment tenure decreases. Alternatively, the loan repayment tenure is extended if the interest rates increase.
This arrangement helps avoid frequent changes to the EMI, which can affect the borrower’s monthly budget. However, you can request the lender to change the EMI amount if that suits your cash flow better.
A floating-rate home loan can be a good option because of the following benefits.
One of the key differences between home loan floating vs fixed is the interest rate. The floating interest rate is usually lesser than fixed-rate loans.
If the floating rate of interest in a home loan decreases, then the cost of the loan can come down.
Any increase in the rate of interest is temporary and can always change. Any downward revision in the interest rates can benefit you.
Therefore, you can consider taking a floating-rate home loan in the following circumstances.
You believe that interest rates will decline in the future, reducing the cost of your loan.
You are willing to take risks associated with the uncertainty of interest rates. Moreover, you are ready to accept the increase in the cost of your home loan if the interest rates rise in the future.
Based on our discussions until now, the following is the comparison brief between a fixed and variable home loan.
Differences |
Fixed-Rate Home Loan
Floating Rate Home Loan
Interest Rate Volatility
The interest rate remains fixed and unaffected by market conditions.
The rate of interest keeps changing depending on market conditions.
EMI and Tenure
Both the loan repayment tenure and EMIs remain fixed.
Either the EMI amount or the loan repayment duration can change as per the changes in the interest rates.
Interest-rate Risk
It has a defined risk providing a sense of security.
It has a variable risk. The borrower must deal with the interest rate uncertainties for the entire tenure.
Ease of Budgeting
Your budget planning becomes easy as you know the exact EMI amount to be paid.
Financial planning might be difficult when you are unsure of the effect of variable EMI or loan repayment tenure.
Prepayment
A fixed-rate home loan can have a prepayment penalty.
As per RBI guidelines, a lender can’t charge foreclosure charges or prepayment penalties on floating-rate home loans.
Tenure Suitability
It can be suitable for short-term loan tenure of 10 years or less.
It can be suitable for longer tenures, like 20-30 years.
There are no clear winners in the floating vs fixed interest rate home loan debate. Each has its own set of advantages and drawbacks. It is recommended to consider your own financial conditions, budget habits, and mindset to pick the home loan best suited for you.
If you’re still confused about choosing a home loan - floating vs fixed interest, then you can choose any of the two types of interest for now. Later, you can change the type of your home loan interest rate by paying a nominal fee.
Finally, you might get more flexibility if you go for a home loan from a reputed non-banking lender than a typical bank. For instance, some lenders like Tata Capital allow you to choose between fixed and floating rate loans that get converted into floating rate loans automatically after 3-years.
Once you decide the type of interest rate to go for, it’s time to shift to a place of your own.