Fixed Rate or Floating Rate: Which Suits You The Best?

Are you still confused between the fixed and floating interest home loans? Go through this and get an idea about which type of loan suits you the best.

The interest rate remains fixed in fixed rate loans. In addition to a regular fixed rate loan where the interest rate is constant throughout the loan term, there are variants available that allow you to set your interest rate for specific periods of 2, 3 or 10 years and are available at any point in time with the lender’s right to reset.

Fixed rate loans provide you an idea about what your repayments will be right from the time of applying the loan.  It also provides you confidence to accurately plan your finances. Fixed rate loans provide a reasonable measure of predictability of your loan tenure. Fixed Rate Interest Loans are mostly priced higher than floating rate loans.

People should choose fixed rate loans in the following circumstances:

• You are comfortable to pay the EMI on monthly basis. The EMI should be around 25-30% of your take home salary.
• You are aware of the hike of interest rates in the future and thus would like to go for a fixed rate.
• If the interest rates have come down and you would like to lock in your house loan at this rate. If the home loan rate was 10% before and have come down to 8.5%, you can opt for a fixed rate loan.

Floating rate home loans which are also commonly known as adjustable rate home loans are usually linked to the lender’s benchmark rate which changes with the market interest rate. The interest rate changes if there is a change in the benchmark rates.

The interest rates of floating rate loans changes at specified intervals. It changes every quarter or half of a financial year depending upon the date of the first disbursement of the loan. If market rates change during the review period, your interest rates will also be adjusted higher or lower as per need. The tenure of the loan that gets re-adjusted to account for the changed interest rate in cases of such rate change. Your remaining loan tenure is extended if the rate increases. This is basically done to prevent frequent EMI changes that may affect your cash flow. But if you want to revise your EMI instead of the loan tenure, you may request the lender.

You should choose a floating rate home loan in the following circumstances:

• If you predict a fall in interest rate over time, you can chose a floating rate loan as it could reduce the cost of your loan.
• If you are unsure about the interest rate movement and prefer to go with the market rates, you should opt for floating rate loans.
• If you are planning to save some of your interest costs in the near future, you can opt for floating rate loans as they ask for a marginally low rate than the fixed rate loans.