Floating vs fixed interest rates: What should you choose for a Home Loan?

The choice between a fixed interest rate and a floating interest rate significantly impacts your home loan. Read on to understand how

Many banks and financial institutions offer home loans. Customers face a challenge to choose where to get their home loans, as most institutions have almost the same terms. However, one feature that can help you make the right choice is the interest rate.

It is of two types: fixed interest rate and floating interest rate. Read on to understand whether to choose a fixed interest rate or a floating interest rate on your home loan also you can check online instant loan.

What is the difference between fixed and floating interest rates?

In a fixed interest rate, the interest is unaffected by changes in the market. The interest is paid on a monthly schedule.

Meanwhile, floating rates, also known as adjustable-rate home loans, are a type of loan in which the interest rate fluctuates over the life of the loan, owing to market rate fluctuations.

Fixed vs floating interest rate

There is no correct answer to “fixed or floating interest rate: which is better?” It depends on the borrower and the market at the time of investment. Still, here are the pros and cons of each.

Pros of a fixed interest rate home loan

Consistency

The advantage of a fixed interest rate is that the interest rate applicable on your home loan does not fluctuate even when the Reserve Bank of India (RBI) alters the rate at which financial institutions can borrow and lend.

Easy to understand

Home loans with fixed rates are simple to understand and vary little from one lender to the other. They are an excellent option for individuals who meticulously plan their budgets. You must pay the same EMIs during the loan term.

Cons of a fixed rate home loan

It is more expensive

Fixed interest rates are typically 1.5-2% higher than floating interest rates. Despite the steadiness in instalments they offer, they may increase the overall cost of your home loan.

No benefit if interest rates fall

Even if the market interest rate falls, customers who have chosen a fixed-rate interest rate scheme would see no change in their EMIs.

Pros of a floating interest rate home loan

Connected to the repo rate

Financial institutions borrow from the Reserve Bank of India (RBI) at the repo rate. Floating interest rates are connected to the repo rate. Home loans with fluctuating interest rates are more cost-effective in the long run, as they have the possibility of decreasing over time.

No prepayment penalty

There are no prepayment penalties with floating interest rates. In floating interest rates, the RBI does not allow any form of prepayment charges imposed on any transfer to a lower interest rate. Fixed interest rates do not offer this benefit. The prepayment penalty remains in place if the loan is paid off before the scheduled repayment period.

Cons of a floating rate home loan

Subject to change

Floating interest rates are inherently erratic, making it challenging for borrowers to manage their budgets. As a result, this option may not be suitable for someone seeking EMI predictability and consistency.

Might be inconvenient

The interest rate may sometimes rise so much that it becomes difficult for borrowers to settle their EMIs. It is because floating interest rates are heavily reliant on market circumstances, which can be volatile.

Both the interest rate methods are unique and can help you lower the burden of your home loan. Instead of finding the best method, you must study the market and decide what is best for you. If you are stuck between the two, contact an IDFC FIRST Bank representative. They may help you decide between a fixed or floating home loan interest rate. IDFC FIRST Bank also provides home loans at attractive rates, along with many other benefits. You can also customise your home loan to suit your requirements.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.