Floating vs. Fixed Interest Rates - Differences & Meaning in Home Loan

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Obtaining a home loan has never been easier, thanks to streamlined processes and great offers. With attractive interest rates, these loans are now accessible to both individuals and co-borrowers, helping many achieve homeownership. However, the choice between fixed and floating home loan interest rates can leave borrowers confused. In this blog, we'll discuss the two primary home loan interest rate types- fixed and floating interest rates, and what sets them apart.

So, why wait? Let’s explore the difference between fixed and floating interest rates so you can make accurate and informed decisions.

What is Fixed Interest Rate?

Fixed interest rates mean consistent interest payments throughout the loan tenure. They offer stability by ensuring the amount paid in equated monthly instalments (EMIs) remains constant. If you go on to compare fixed vs floating interest rate, fixed interest rates will most probably be higher.

As the name suggests, fixed interest rate home loans are where you as a borrower pay a fixed amount of money as instalments over the entire tenure of your home loan. The number of instalments remains the same over the decided time period.

Advantages of Fixed Interest Rates

Fixed interest rates in India offer stability and protection against market volatility. Here's why they are advantageous, especially when applied to home loans:

Fixed interest home loans in India provide a consistent, unchanging interest rate, ensuring predictability in monthly payments.
This predictability makes them a secure choice for homebuyers, as you can plan your budget with confidence, knowing that your mortgage payments won't fluctuate unexpectedly.

With these benefits, fixed interest rates for home loans provide financial security and stability.

Disadvantages of Fixed Interest Rate

When comparing fixed vs floating interest rates, fixed interest rates come with certain drawbacks, particularly when applied to home loans:

Fixed home loan rates are typically 1% to 2.5% higher than floating rates, which can lead to higher overall borrowing costs.
Regardless of market movements that may cause interest rates to decrease, you'll still be locked into the same, potentially less favourable rate.
If you prioritise the flexibility to adapt to changing market conditions, a fixed interest rate might not be the most suitable choice for you.

These disadvantages should be considered when deciding whether to opt for a fixed interest rate for your home loan.

When Should You Opt for Fixed Interest Rate?

This type of home loan interest rate is ideal for you if:

The current interest rate is low compared to historical rates, allowing you to secure a favourable rate for the long term.
You seek stability and prefer to avoid the uncertainties of fluctuating interest rates.
The calculated EMIs do not exceed 25–30% of your monthly income, ensuring that fixed payments align with your financial capacity.

Opting for a fixed interest rate under these circumstances can provide you with financial security and peace of mind throughout the loan tenure.

What is Floating Interest Rate?

Floating interest rates change according to market conditions. Loans with floating interest rates are bound to a base rate offered by different banks along with a floating element. Therefore, any change in the base rate influences the floating interest rates, making them change from time to time. Between the two loan interest rate types, floating home loan interest rates are rapidly gaining popularity among homebuyers.

Nowadays, borrowers can also take the help of a home loan EMI calculator to estimate the monthly instalments of their loan. Finally, the Marginal Cost of Funds based Lending Rate (MCLR) influences the base rates of loan lending organisations. MCLR is a minimum lending interest rate: below this, banks cannot lend money to potential borrowers. Borrowers can compare both home loan interest rate types and use them to their advantage.

Advantages of Floating Interest Rate

Floating interest rates offer unique advantages for home loan borrowers. Here's why they might be the right choice:

While they may occasionally rise, floating rates are generally 1% to 2.5% lower than fixed rates, potentially leading to more overall cost savings.
They provide an opportunity for lower interest payments, especially in a falling interest rate market, potentially reducing the total cost of the loan.
Floating interest rates for home loans often come with the flexibility of part prepayment and no foreclosure charges, providing additional financial freedom.

These advantages make floating interest rates an appealing option for borrowers seeking cost-effective and flexible home loan solutions.

Disadvantages of Floating Interest Rate

While floating interest rates have their merits, they also present certain drawbacks, particularly in the context of home loans. It's crucial to understand these potential disadvantages:

The primary drawback is the inherent unpredictability of floating rates. Their constant changes can make it challenging to forecast future loan costs.
Frequent fluctuations in floating interest rates can complicate financial planning and lead to unexpected increases in your monthly payments.
If the floating rate becomes significantly higher, it may strain your budget and impact your savings negatively.

Read a Similar Article: How Repo Rates Impact Your Home Loan Interest Rates?

When Should You Opt for Floating Interest Rate

Floating interest rate home loan is ideal for you if you have opted for a long-term loan. For someone who is well-versed with the real-estate industry, floating interest rate is always a preferred choice. You can benefit from the market fluctuations as monthly payment may reduce. The interest rates change every 3 to 6 months based on rates like MCRL and Repo rate.

If the interest rates for home loans are predicted to go down, floating interest rate for home loans can prove to be beneficial.

Differences between Fixed Vs Floating Interest Rate

In fixed interest rate home loan, the interest rate remains the same whereas the floating rates keep on changing. The unpredictability of floating rates does not work in their favour and that’s one of the reasons why many borrowers prefer fixed interest rate home loan. The market conditions do not affect it. Fixed interest rate home loan might sound like a good option but the interest is higher. However, if you plan carefully, fixed rate home loans can be charted out and repaid in affordable fixed EMIs. This type of interest on home loan helps customers feel a sense of security. Whether you choose fixed or floating home loan, it is important to know the key differences between them. When fixed and floating interest rate are compared, they both have their pros and cons:

Fixed rate	Floating rate
High-interest rate	Low-interest rate
Remains constant	Is subject to change
Allows financial planning	Makes financial planning difficult
Can be used for short term loans	Can be used for long term loans

Now that you know the two home loan rate types, you can take an informed decision.

Existing Why are Floating Interest Rates Better?

Particulars	Fixed interest rate	Floating interest rate
Interest rate	The interest rate in fixed interest is higher.	Floating interest rates potentially come with lower interest rate.
Stability	The interest amount remains constant in fixed interest rate. This makes it a stable option.	Floating interest rate come with fluctuating interest amount. This is an unstable option and is subject to change based on market conditions.
Suitable for	It is suitable for short-term loans	It is suitable for long-term loan type like home loans

Lower interest rates

Floating rates are usually slightly lower than fixed interest rates. Lenders charge more for fixed interest rates to cover their interest risk for the entire tenure. While it depends on the lender, the difference can be telling. Therefore, while you might think that the fixed interest rate would be cheaper due to its fixed nature, the total interest outgo can be much higher in the longer run.

No prepayment charges

As per Reserve Bank of India's mandate, lenders cannot charge a prepayment fee on floating interest rate home loans. Therefore, if you plan to prepay your home loan, you will not need to pay any foreclosure charges. Usually, the prepayment charges are 2% of the outstanding loan amount. However, this concession is not applicable on fixed interest rate home loans.

Transparent

Floating interest rates have more transparency and flexibility. They are cost-effective and provide you flexibility in benefiting from competitive pricing structures. It also helps you easily opt for a home loan balance transfer.

Though floating interest rates are uncertain and keep changing throughout the tenure, they are usually cheaper and cost-effective. Therefore, you must research both home loan interest types before you apply for a home loan. If you are confused, it would be best to consult a financial advisor and then decide.

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Frequently asked questions

1.) Can you shift from a floating rate of interest to a fixed interest rate or vice versa?

Yes, conversion between fixed and floating rates is allowed under certain terms and conditions.

2.) When should I consider a fixed home loan over a floating home loan?

Opt for a fixed home loan if you prioritise payment stability and can bear a slightly higher interest rate.

3.) Is there any prepayment penalty on floating interest home loans?

No, as per RBI guidelines, floating interest home loans do not have prepayment penalties.

4.) Is a fixed-rate home loan the right choice for a borrower aged 40?

Yes, A fixed-rate home loan can be suitable for someone aged 40 looking for long-term payment stability.

5.) Can I opt for pre-sanctioned offers while choosing a floating interest rate home loan?

Yes, you can explore pre-sanctioned offers when selecting a floating interest rate home loan, and choose which offer gives you most value for money.