Fixed Interest Rate Vs Floating Interest Rate

Are you planning to buy a property through a home loan? How well informed are you about the home loan interest rates and their types? Home loan interest rates are divided in to 2 categories- Fixed interest rates and Floating interest rates.

What are fixed interest rates?

Property investmentAs the name suggests, fixed interest rates refer to fixed equated monthly installments that are to be paid throughout the tenure of the loan. In these cases, irrespective of market fluctuations, the interest rates do not change. Also during the initial part of the loan tenure, the larger chunk of the EMIs paid by a loan seeker is attributed towards the servicing of the interest while in the later part of the tenure; the principal amount is served. Hence, under the fixed interest rate, you know the exact EMI amount that is to be repaid. You should take a home loan with a fixed interest rate if you are the type of person who takes calculated risks.

Advantages Disadvantages
Fixed EMIs despite market fluctuations Fixed interest rates are higher compared to floating interest rates
Suits people who take calculated risks, who are good at budgeting and who need a fixed monthly repayment schedule As the name suggests, fixed interest rates are fixed in nature and does not fetch the benefit of reduced interest rates even in a volatile market
Provides a sense of security and certainty Comes with pre-payment penalties and exit charges, especially if the loan is refinanced through another lender
Beneficial in an increasing interest rate market Has rigid norms with respect to partial pre-payment

What are Floating interest rates?

As the name suggests, floating interest rates float/vary with market conditions. Also known as variable/adjustable rates, they are nothing but varied interest rates based on the market conditions. Therefore, a change in the base rate will result in a change of the floating interest rates. For banks with floating interest rates, the effective rate will be automatically linked to the bank’s base rate, which may be declared by the bank as often as every quarter. Floating rates are normally lower than fixed interest rates but having said that, you will gain from such rates only till such time the interest rates are falling. It is also important to note that fluctuations in these rates do not affect the amount of EMIs you pay and instead affects the tenure of your loan.

Advantages Disadvantages
Floating interest rates are cheaper than the fixed interest rates These rates are only cheaper till the time they surpass the fixed home interest rates
Even if these rates surpass the fixed rate, it will only be so for a certain period and not for the entire term of the loan Monthly payouts, under this scheme, are highly uneven in nature. Therefore, a loan seeker might have to pay a large amount in case there is a hike in the interest rates
Despite its volatile nature, even if the rates go very high, they are bound to fall. Thereby resulting in large savings for the borrower
There is no prepayment penalty on Floating interest loans as per RBI guidelines

Other home loan schemes

If at all you are keen on some predictability in your EMIs, dual-rate loans may be one option. A large number of banks divide the tenure of loan by fixing the first two to three years for Fixed interest rate and the rest years for Floating interest rates. For instance, LIC Housing Finance offers an attractive scheme for women called Bhagyalakshmi which offers a fixed rate for the first two years, after which the loan gets converted into a floating rate one.

Sharing our posts!

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top