Floating interest rate vs. fixed interest rate - What should you choose
Home loans, the blessing for middle-income people to fulfil their dream of owning a house. But do you think it is really easy to decide whether to take it or not?
Probably Not!! Because many factors such as your income, age, family size, budget, tenure of the loan and interest etc, matters. However, the most influential factor is the interest rate and why not when you are going to repay more than you took as interest. It is the factor that every potential homebuyer considers before applying for the home loan.
Taking a home loan is probably the biggest financial decision of one’s entire life. Similarly, choosing the best interest rates is also a part of your decision making before taking a home loan. It is tough yet confusing at the same time because home loans come with two interest rates that are: Fixed and Floating. Customers opting for a home loan have the option to choose either type of interest rates. Therefore, homebuyers need to understand about fixed and floating interest rates in detail.
What is a Fixed Interest Rate?
A fixed interest rate home loan is a loan where the interest rate doesn't fluctuate during the fixed-rate period of the loan. This enables borrowers to accurately anticipate their future EMIs as on fixed-rate loans, interest rates stay the same for the entirety of the loan's term.
What is Floating Interest Rate?
Floating Interest home loan is a loan where the interest rate fluctuates based on a reference rate. The interest rate moves up and down with the market or an index. It can also be referred to as a variable interest rate because it can vary throughout the debt obligation. However, the biggest benefit of the floating Home Loan interest rate is that it is normally lower than the fixed interest rate.
Now that we know what the meaning of both the interest rates is, let's move towards their respective benefits:
Benefits of Fixed Interest Rate-
The prime benefit of going with a fixed interest rate is that you get a sense of certainty since you know what your repayments will be right from the time of taking the loan.
In fixed-rate, there are variants available which allow you to fix your interest rate for specific periods of 2, 3 or 10 years. It is available with the right of reset by the lender at any point in time.
This interest rate is less risky than the floating because it is not affected by the marketing fluctuations that gives you a sense of security.
Benefits of Floating Interest Rate-
The prime benefit of floating interest rate is that it is adjustable. The rate moves in sync with the market interest rate. If there is a change in the lender's benchmark rate, the interest rate also changes proportionately.
If the floating interest rate rises, it will only for a short duration. It will not last throughout the whole duration of your loan tenure.
It has a shorter loan repayment duration. This makes it an excellent choice for those who require additional loans shortly.
Which is the best option?
It depends upon the borrower with which option they would like to go as it depends upon multiple factors. However, here we have come up with some points that might help you to make your decision.
When you should opt for a fixed interest rate?
If you are comfortable with the EMI you are committing to pay as it often remains the same throughout the tenure. But make sure it should not exceed 25-30% of your gross income.
If you have good forecasting skills and you are able to perceive a scenario of rising interest rates in the future.
If the interest rate is way lower at the time you are opting for a loan, go with h fixed rate.
When you should opt for a floating interest rate?
If you are expecting interest rates, in general, to fall over time, opting for a floating rate home loan is the best option.
It is suitable if you are unsure about interest rate movements and would prefer to go with the market rates.
If you are looking for some savings on your interest cost in the near phase, the floating rate is a good option as it is usually set at a marginally lower rate than a fixed-rate loan.
Selecting the fixed option or floating home loan interest rate option will depend on your needs, preferences and financial profile. It is advisable to take the help of professionals if needed to make the right decision.
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