When you plan to buy a property using a Home Loan, the housing loan interest rate is one of the most important factors in your repayment strategy. Lending institutions offer two options in this regard – fixed and floating. Since the type of interest rate you choose can significantly impact your monthly instalments (EMIs) and the total loan cost, being careful about the final decision is imperative.
Let us understand the pros and cons of these two options. It will help you make an informed decision when you opt for a Home Loan.
What are Floating Housing Loan Interest Rates?
As their name suggests, floating rates vary according to market conditions. If you select this option, it will have a base rate with a small scope for the floating element. Your Home Loan interest rate will change with changes in the base rate. In addition to this, the repo rate set by the Reserve Bank of India (RBI) directly affects it, as floating rates are linked to the repo rate as a benchmark. When the repo rate increases, so do floating interest rates, and vice versa.
Pros of Floating Interest Rates: One essential benefit of floating interest rates is that they can be cheaper than fixed rates (depending on market behaviour). Floating rates can be volatile, but there's no guarantee they will eventually fall. Future market conditions will determine its direction. So, it helps save a substantial amount when repaying the loan.
Cons of Floating Interest Rates: As the floating interest rate changes regularly, the monthly instalments also change occasionally. Such uncertainty in the EMI amount adds to instability and makes financial planning more challenging.
What are Fixed Housing Loan Interest Rates?
A fixed-interest home loan is the opposite of a floating-rate loan. In this type of settlement, the interest rate remains constant throughout the repayment tenure. Moreover, with a fixed-rate loan, the initial EMIs mostly service the interest component without the principal component. Gradually, they shift to the principal component later in the tenure.
Pros of Fixed Interest Rates: Since the interest rate remains constant throughout the repayment tenure, borrowers find it easier to manage their finances according to the fixed EMI amount. It is an excellent choice that gives the loan plan a sense of certainty and security.
Cons of Fixed Interest Rates: Fixed interest rates are generally higher than floating rates. That means even if the base rate falls, borrowers must pay the fixed interest rate determined at the time of borrowing. As a result, borrowers will be unable to benefit from falling housing loan interest rates.
Differences Between Fixed and Floating Interest Rates
Deciding Between Fixed and Floating Interest Rates
If you are confused about choosing a Home Loan online with fixed or floating interest rates, here is a guide to help you decide
When to Choose a Fixed Interest Home Loan: A fixed interest Home Loan is ideal if the interest rate at the time of borrowing is low and you want to lock the rate for the entire tenure. Moreover, it is a suitable option for those who do not want their EMIs to change constantly.
When to Choose a Floating-Interest Home Loan: This option is for those well-versed in the real estate market. It can be a beneficial deal if the rates are high and likely to fall soon.
Both floating and fixed interest rates have pros and cons when applying for a Home Loan online. Ultimately, the decision to choose one is yours. Understand the pros and cons of both and compare carefully to make the final decision. Lending institutions like Kotak Mahindra Bank you can borrow a Home Loan with attractive interest rates and repay with a tenure that suits you best.