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Home Loans: Floating vs Fixed Interest Rates

While a fixed interest rate grants certainty and security, its floating counterpart might facilitate unexpected financial gains.

Updated:March 28, 2019, 5:08 PM IST
Home Loans: Floating vs Fixed Interest Rates
While a fixed interest rate grants certainty and security, its floating counterpart might facilitate unexpected financial gains.

Home loans are almost always the go-to option for most of us when it comes to financing the purchase of our dream home. Moreover, with the information available over the Internet, getting a home loan has become easier than what it was before.

However, choosing the best option that would be a perfect fit is still a complex task. Among a number of factors, the interest rate is certainly one of the most crucial while deciding on a particular home loan product.

Interest rates on a home loan can either be fixed or floating, and if you are confused over which one would best suit your needs and financial obligations, here is all that you need to know:

Fixed Interest Rate

A fixed interest rate on a home loan is one that doesn’t fluctuate over the tenure of the loan. With a fixed rate of interest, you can precisely arrive at the exact monthly installments payable towards the loan. In other words, a fixed interest rate is one that doesn’t differ, no matter how market dynamics play out.

Advantages of Fixed Interest Rate Loan

● Since the interest rate remains fixed over the loan tenure, irrespective of market conditions, it allows you to predict accurately all future payments towards a home loan; thereby helping you chalk out a planned monthly budget

● With a fixed rate of interest, you would be able to retain a lower rate, should market dynamics change and interest rates register a sudden and steep increase. Depending on the bank and the prevalent interest rates, this allows you to bring down monthly payables and reduce total interest outgoes

Drawbacks of Fixed Interest Rate Loan

● Chances are that a fixed interest rate will be higher than its variable counterpart. That is because fixed interest rates don’t allow the bank to make much from your loan in case of comparatively higher interest rates in the market

● Despite a drop in prevalent interest rates in the economy (resulting from fluctuation in market conditions), you would still have to pay at a higher rate of interest; thereby losing out on the chance to benefit from a dip in the market

Floating Interest Rate

A floating interest rate (also referred to as an adjustable or variable interest rate) is one that varies according to market dynamics or along an index. A floating interest rate impacts monthly installments towards the repayment of the loan, and eventually the total interest outgoes as well.

Advantages of Floating Interest Rate Loan

● Floating interest rates are relatively lower than fixed rates of interest. This is because with a floating rate of interest, the bank has room for flexibility to benefit from your loan when interest rates rise steeply in the market

● A floating interest rate benefits you when markets fluctuate and interest rates dip below the base rate. This brings down the EMIs payable towards a home loan and results in monetary gains

Drawbacks of Floating Interest Rate Loan

● With a floating rate regime, interest rates on your home loan would fluctuate, in keeping with market oscillations. Therefore, accurate prediction of monthly payables and planning a budget for the same become challenging

In conclusion, both floating and fixed interest rates offer certain advantages and disadvantages, and it is on you to decide the type that would complement your needs the best. While a fixed interest rate grants certainty and security, its floating counterpart might facilitate unexpected financial gains.

To know more, click here.

This content has been created in association with YONO SBI.

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