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Tata Capital > Blog > Loan for Home > Why Floating Rate Home Loans Hold An Edge Over Their Fixed Interest Peers?

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Why Floating Rate Home Loans Hold An Edge Over Their Fixed Interest Peers?

Why Floating Rate Home Loans Hold An Edge Over Their Fixed Interest Peers?

Are you ready to seal the deal for your dream house? Although it's an excellent investment, you must consider several factors before making an informed decision. These factors include location, legal documentation, down payment, loan amount and tenure, etc. And a major factor that decides your EMI value is the home loan interest rates. 

Financial institutions allow you to choose from two types of housing loan interest- fixed rate and floating rate. In the fixed rate home loan, the rate of interest for the tenure of the loan remains the same. But in the floating interest rate home loan, the interest rate changes with a change in market conditions. Let's understand this in detail.

What is floating interest rate on a home loan?

Floating rate home loans are interest rates that fluctuate based on prevailing market conditions. They are adjusted periodically- quarterly, semi-annually, or annually- based on the terms and conditions of your loan and the prevailing home loan interest. If you opt for a floating rate for the home loan, you will have to pay a base rate which is modified depending on the market. It is nothing but the minimum interest rate set by financial institutions. Lenders are not allowed to extend loans below this rate.

Difference between floating and fixed home loan interest rates

Choosing the right housing loan interest rate is crucial, as it can have a significant impact on your EMIs. Both fixed-rate and floating-rate have their pros and cons. Let's differentiate them to get a better understanding.

Point of DistinctionFixed Interest RateFloating Interest Rate
Rate of InterestCan be relatively high rate of interestCan be relatively low interest rate
EMIsFixed EMIs throughout the loan tenureEMIs can change depending on the interest rate
Market ImpactNot affected by changes in the marketAffected by changes in the market
Budget PlanningYou can determine the monthly budgetYou can't determine monthly finances
SecurityIt is secure as it is not affected by market conditionsIt is not as secure but can generate savings
RiskLesser riskHigher risk
SuitabilitySuitable for short-term loans (3-10 years)Suitable for long-term loans (20-30 years)

Why are floating rates in home loans better than fixed rates?

Although floating interest rates on a home loan can make it difficult for you to set a fixed monthly budget, they are better than fixed rates of interest. Here's why -

1. Low home loan interest rates

Floating rates for home loans are usually lower than fixed rates. When you opt for fixed housing loan interest, lenders will charge you more to cover their risk for the loan tenure. This difference can be anywhere between 250 and 400 basis points. Although floating rates will vary based on the current home loan interest rates, they are unlikely to surpass the fixed rate.

2. Zero prepayment penalty

The Reserve Bank of India does not allow financial institutions to impose a prepayment fee on floating home loan interest rates. Therefore, if you want to prepay your home loan, you will not have to bear any foreclosure charges. As a result, you can pay off the debt quickly. However, this does not apply to fixed rates. Under fixed home loan interest, you'll have to pay 1-2% of the balance loan amount as prepayment charges.

3. Cheaper than the fixed rate

The current floating interest rate is volatile to market fluctuations. However, in the long run, it is cheaper than fixed rates. Let's understand this with an example. Suppose you've opted for a floating interest rate, and it rises by 1-2%. Now, as the current home loan interest rates increase, the lender will adjust the tenure of your loan instead of the monthly instalments. This means that instead of charging a higher EMI, the lender will extend the duration of your loan.

4. Unexpected gains and savings

Suppose you've taken a loan from a lender at a fixed home loan interest of 15%. The same lender will offer the same loan at a floating interest rate of 12.5%. Now, even if there is a market fluctuation, you'll end up paying 2.5% more in interest. This will increase the overall value of your loan. The chances of floating interest rates exceeding fixed interest rates are very slim and temporary. This happens only when the market is extremely volatile. As a result, you can increase your monthly savings and enjoy unexpected gains. 

Before you go

Depending on your requirement and the current home loan interest rates, you must make the right decision between fixed and floating rates. A wrong decision can put a big strain on your finances. Floating home loan interest rates offer several benefits like low rate of interest, zero prepayment charges, flexibility to reduce the interest rate, etc. 

With Tata Capital's home loan, you can enjoy benefits like a wide range of multipurpose loans, easy repayment plans, flexible loan tenures, and much more. All you must do is click on the 'Apply' button on our website and fill in the required details. You can also make use of our home loan EMI calculator to determine your potential EMIs. 

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