Taking on a loan is a long-term commitment. Especially in the case of home loans, as they tend to have longer tenures as compared to other loans. You need to be thoroughly informed about what you’re signing up for, or you might find yourself in a tough spot later on.
The interest rate is the most important consideration when applying for a loan. You are likely to choose a lender that offers lower interest rates than others. But did you consider what type of interest rate works best for you? Home loan interest rates could be fixed or floating. Almost all lenders will offer you a choice between fixed interest rate and floating interest rate home loans.
Read on to find out the differences between fixed and floating interest rates for home loan.
Fixed interest rate
A fixed interest loan, as the name suggests, has a fixed rate of interest throughout the entire tenure. Economic fluctuations do not affect the rate of interest and therefore the borrower has to pay fixed, equal EMIs over the entire loan period.
Floating interest rate
In the case of loans with a floating interest rate, the rate of interest is subject to change according to the prevailing economic conditions. The floating interest rate is made up of a base rate and a floating element. The floating element is expressed as a percentage of the base rate. Therefore, if the base rate changes, the floating element automatically changes. Lenders revise their floating interest rates as per the quarterly base rate announcements made by the RBI.
Additional Read: Some Factors That Impact Home Loan Interest Rates
Floating vs fixed interest rates
Both fixed and floating interest rates have their advantages and disadvantages. The most noticeable difference between fixed and floating interest rates for home loan is that fixed interest rates are higher than floating interest rates. The difference can be anywhere between 1% and 2.5%. But some borrowers might not mind paying a premium for the sense of certainty that loans with a fixed interest rate allow.
Considering that a home loan might take decades to pay off, many people, especially salaried individuals, budget their expenses around their EMIs. If their EMI was to increase all of a sudden, it would throw off their entire budget. Therefore, when buying a house, such borrowers would prefer a fixed interest rate home loan even if they have to pay a higher EMI.
Others may not mind the fluctuation in their EMIs as much. They might be more interested in getting a cheaper loan, especially if they are optimistic about the future and don’t expect the interest rates to rise much. But even if the floating rate increases, say it even goes beyond the fixed-rate, it will stay there for a limited period and not for the entire tenure of the loan. The interest rate is most likely to fall over a long period. In which case, floating interest home loans could help you save a lot of money.
Additional Read: Check out how to calculate interest rate on home loan
So, floating or fixed home loan, which is better? There is no definitive answer to the question. What works well for one borrower, might not work for the other. You could visit the Tata Capital website and use the home loan EMI calculator to see what suits you better. Tata Capital offers home loans at attractive interest rates and minimum documentation to help you cover costs for all your housing needs.