Fixed vs. Floating Interest Rates for Home Loans
Buying a home has varied meanings for different people. The house becomes a place where we commemorate life’s significant events.
Our homes provide a haven for us to keep our belongings, create memories, and share meals with friends. There, we raise our children, rock our grandchildren, and live our lives, good and bad.
When it comes to making a purchase, even one as large as a house, research reveals that our emotions drive us more than we realize.
And in the flow of our emotions, we sometimes make incorrect or situations that are not so ideal.
Home Loan interest rates and which types to choose are one of the decisions that most people go wrong with.
Let’s begin by knowing what “Interest rates” are!
The interest rate is a percentage of the principal—the amount borrowed—that a lender charges a borrower. The annual percentage rate (APR) is the term used to describe the interest rate on a loan (APR).
Interest is a fee levied on a borrower for the use of an asset. Cash, consumer items, vehicles, and real estate are examples of assets that can be borrowed.
The majority of loan and borrowing transactions are subject to interest rates. Individuals take out loans to buy houses, fund projects, start or expand enterprises, or pay for college tuition. Businesses borrow money to fund capital projects and grow their business by buying fixed and long-term assets like land, buildings, and machinery. Borrowed funds are repaid in whole on a predetermined date or in monthly payments.
Now let’s move on to the different interest rates for a home loan!
Fixed-Rate: A fixed rate of interest indicates that your interest rate will not change during the term of your loan. It remains constant regardless of changes in bank lending rates or Reserve Bank of India repo rates (RBI).
The Equated Monthly Instalments (EMI) will not change during the term. Some lenders provide loans with a fixed interest rate for the first few years of the term before transitioning to a floating rate thereafter.
Pros of availing fixed interest rates on home loan
-Interest rate: Throughout the loan term, the interest rate remains constant and is unaffected by market conditions.
-EMI: Your EMI is set because the interest rate does not fluctuate over time, making it easier to manage your monthly budget and long-term financial savings or investments.
Cons of availing fixed interest rates on home loan
-A fixed interest rate is often 1% to 2.5 percent more than a bank’s or non-banking financing company’s fluctuating interest rate (NBFC).
A fixed-rate of interest is often only effective for a few years before being updated to reflect the current rate.
-Even if the fixed interest rate drops as a result of a government or Reserve Bank of India (RBI) announcement, the loans already taken out at the prior rate are unaffected.
Even if the interest rate is reduced, the borrower will be required to continue making payments at the higher rate.
Why you should go for fixed interest rates?
–You desire a set repayment timeline and are willing to pay the current interest rate. You should make sure that your monthly payment does not exceed 30% of your net monthly salary.
-You anticipate an increase in the interest rate in the future and want to make sure that your interest payment does not climb more than it is now. In this case, the fixed interest rate can be utilized to lock in the lender’s existing interest rate.
-When interest rates have fallen and are expected to stay the same for a few more years.
Floating Rate: A floating interest rate fluctuates according to the market conditions. The interest will be calculated using a base rate with a floating element, so that if the base rate changes, so will the floating rate.
Pros of availing floating interest rates on home loan
-Floating interest rates are typically 1% to 2.5 percent lower than fixed interest rates offered by the same lender.
-A bank’s or non-banking financing company’s variable interest rates are frequently lower than the fixed rates it gives its customers. As a result, even if the variable interest rate rises, it may still be lower than the fixed interest rate previously offered.
-The fluctuating interest rate will not surpass the interest rate for the duration of the loan. After a given amount of time, there is a risk that the floating rates will decrease.
Cons of availing floating interest rates on home loan
-The monthly instalments of a specific amount of loan will change over the loan lifetime due to the shifting nature of floating interest rates.
-It is quite difficult to budget a loan with a fluctuating rate of interest due to the irregular monthly instalments.
-Because this interest rate option does not allow for a fixed payback timeline, you may end up paying more than you are comfortable with. As a result, you may find yourself with less funds and no budget plan.
Why you should go for floating interest rates?
-When there are good reasons to believe that interest rates will fall in the future.
-This form of interest rate is typically preferred by persons who lack market knowledge and hence prefer to stick to market rates.
We hope we were able to provide some useful insights on floating vs fixed interest rates on a home loan, so that you can make an informed decision or help others do the same, by sharing this blog!
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