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What Should You Choose Fixed Rate or Floating Rate Home Loan?

05-Aug-2021 | Home Loan Eligibility

The home loan, as we all know, holds a pretty long tenure while it is paid back. Among the imperative elements of this loan is the rate of interest associated herewith. Now we will consider the two types of interest rates viz. Fixed and Floating Interest Rate: 

Fixed Interest Rate Loan

In the Fixed Interest Rate Home Loan, the interest rate is affirmed prior to the time you go in for the loan. The equated monthly installments i.e. EMIs are fixed for the complete loan tenure if one chooses this interest rate. In case, even if there is a change in the Repo Rate or the market interest rate, this rate of interest would not change. Thus, you can easily calculate the amount of interest that is payable in the form of EMI in advance and accordingly plan the budget.      

Floating Interest Rate

As far as floating rate loan is concerned, the change in Repo Rate changes the rate of interest here. It is the Reserve Bank of India that ultimately announces the policy rates, which affirms the Repo Rate. It may also be added that if the Repo Rate shoots up, then the home loan rate also follows suit and moves up. While, in case, the Repo Rate dips down, the home loan rate also comes down.    

It may be mentioned that a change will be observed in the floating rate and this only depends on the conditions observed by the bank. The term used in this pretext is ‘reset’ and the bank informs the borrower about the frequency associated with the reset in loan application. As and when a change is observed in the rate of interest then either the EMI or the loan tenure shows a change.

What is Repo Rate?
Repo rate indicates the rate at which financial institutions borrow money by liquidating their securities to the Reserve Bank of India (RBI), in the event of funds shortage or other statutory measures. It’s an important tool for RBI to keep inflation rate under control.

How Do Floating and Fixed Interest Rate Loans Differ?

  • The remarkable difference between these two types of interest rates is that fixed interest loan rate is higher in comparison to the floating rate loan.  
  • Also, an increase or decrease may be observed in floating rate but this is not so in the case of fixed interest rate loan.

If at the time of applying for a loan, an individual thinks that the interest rates are low, he may go in for a fixed interest rate loan. This helps him to enjoy lower rate of interest and that too, valid for the entire loan tenure. On the other hand, if one thinks that the rate of interest may go down in the future, one can choose the loan with floating interest rate. Here, one can enjoy the benefits associated with this type of interest rate.

In the current pandemic situation, if you are planning to opt for a home loan then this is the best time to avail it, as the RBI repo rate has plunged to its lowest. You can opt for the fixed home loan interest rate.

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Comments:

Yogesh Acharya on 23-Jul-2021

Good one and informative

Reply:

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