Should you choose a floating rate home loan or a fixed rate home loan? If you are thinking of buying a home for the very first time, it is natural that you may be a little confused between these two options. You should understand both types very carefully before taking any decision.
Fixed rate home loans- These loans have the borrower paying a constant rate of interest throughout the entire tenor. This rate does not change with any market fluctuations. Fixed rates are higher than variable rates in a situation where the discount rate is low historically. Lenders offer discounts to borrowers in order to easily set rates of interest whenever the rates are high historically. Future payment certainties remain with fixed rate home loans. Future financial obligations can be easily worked out and there are no fluctuations with any market-linked changes. The disadvantage here is that in case market fluctuations make home loan rates go down, these borrowers will not benefit at all.
Variable rate home loans- These home loans will changing interest rates throughout the tenor. The rates will fluctuate on the basis of the benchmark rate. In case the interest rates go down with market changes, the borrowers will benefit. However, if they increase, the borrowers will have to pay higher EMIs in turn. Variable or floating interest rate home loans will always be more flexible in comparison to fixed rate home loans. Borrowers can get benefits in case the interest rates are down in the market and this will help them boost their financial position even further. However, variable rates are always unpredictable and in case market rates start moving upwards, loan costs will increase hugely for borrowers in turn.
Your own requirements should be the basis for selecting floating or fixed rate home loans. You should ideally select a fixed rate home loan in case market rates are forecasted to go up in the future and you are comfortable paying the current EMI. However, you can go for a variable rate home loan in case a drop in interest rates is forecasted for the near future and the entire market is already witnessing a fall in interest rates. Both types have their own positives and negatives. Fixed rate home loans help you plan your budget carefully while floating rate home loans help you get the benefits of any reductions in interest rates.