Home loans are definitely a major life decision in today’s times since they represent a big life decision and have to be suitably managed for several years. Now it’s not only about having the repayment capacity to pay off a home loan for a property at a certain budget. One also has to factor in the interest rate which influences the monthly EMIs that we pay and the overall cost of the loan. In this scenario, which one is better- fixed interest rates or floating interest rates? This is something of an eternal dilemma that has plagued prospective homebuyers for years.
Which is the right choice for you? Here’s taking a closer look at the intricate nuances of both fixed and floating interest rates and which one’s best for your needs.
Fixed interest rates
Fixed interest rates on home loans are those which do not change over time. This means that the interest rate and the EMI will remain the same over the course of the entire loan tenor. The rate of interest will be fixed and there will be no fluctuation based on market circumstances. There are also some particular types of fixed interest rate home loans which enable customers to keep the rate fixed for specific durations, i.e. 5 years or even 10 years and can be reset accordingly by the lender. A fixed interest home loan will naturally build more confidence initially for borrowers since the monthly repayment amount remains fixed without the need for frequent calculation and re-calculation.
Choosing a fixed interest rate means that you can plan out your finances much better since you already know what the total cost of the loan will be throughout the entire tenor. Fixed interest home loans are mostly costlier as compared to floating rate home loans. A fixed interest rate home loan works well in these cases:
- In case the borrower feels that interest rates will only keep rising in the future and would like to lock in the present rate of interest.
- In case the borrower is totally comfortable with the monthly EMI payable and this should not be more than 25-30% of his/her net monthly income in an ideal situation.
- In case interest have recently come down and borrowers are really comfortable with the same, they might consider locking down this rate with a fixed interest home loan. Suppose the home loan interest rate was roughly 9.5% sometime earlier and it has recently come down to 9% and you can lock this rate in case you are totally comfortable with the same.
Floating interest rates
Floating interest rates are basically tied to benchmark rates of lenders which change in tune with market rates. These home loans are also known as adjustable rate loans for this reason. In case the benchmark rate changes, the rate of interest on the home loan will also change in tandem with the same. The interest rates on these loans are usually reset at particular time intervals which could be half-yearly, one year or even every quarter. In case of any market rate changes in the intermittent period, the rates will either be more or less after getting reset. In most cases, the loan tenor is usually re-adjusted. It comes down if the rates are lower and goes up if the rates are higher. However, borrowers can also request for EMI revisions instead of changes to the loan tenor.
Home loans with floating interest rates work well in these cases:
- In case the borrower is expecting a fall in interest rates over a period of time and wishes to cash in on the benefits of the same which will lower the cost of the loan in the near future.
- In case the borrower is not sure about the movements of interest rates and prefers to opt for market rates.
- In case you are seeking interest cost savings in the short term, then floating interest loans are a good option since they are usually cheaper than fixed rate home loans which will help you save on costs immediately.
What you should opt for
In case you are still not confident about choosing the right interest rate type for your home loan, you can take a mixed approach. You can always go for a home loans which is partly floating and fixed alike. In case you have other repayments and expenses to bear for a period of say 3-5 years, then you can choose a fixed interest rate for this duration. Once this period passes, you can always choose a floating interest rate for the remaining tenor of the home loan. This facility is available with several lenders and you should definitely keep an eye out for the same.
Future interest rates cannot be accurately predicted or forecasted in most situations and rates may change in a manner which is far from what you expect. However, you should opt for a home loan where the lender enables you to switch from floating to fixed or vice versa whenever you desire. Floating interest rates are usually the preferred option nowadays since they come with more flexibility and the possibility of greater cost savings through lower rates of interest over a long period of time. The conversion from fixed to floating rates of interest can be easily done by paying only a small charge. There are no prepayment penalties however for floating interest rate home loans, something that you will have to bear in case of fixed interest rate home loans.
Choose a floating interest rate if you are expecting a drop in interest rates in the future and want to save money on interest costs over the long haul. Choose a fixed interest rate in case you are totally at ease with the EMI you are committing to repay over the loan tenor and also expect interest rates to rise in the future. You may also choose a fixed interest rate in case the rates have come down recently and you wish to lock in the same on your home loan. In case you cannot decide at all, you can choose a combination of both floating and fixed interest rates as mentioned above or choose one and switch later on by paying a small charge.