If you are planning to take a home loan anytime soon, you’re most likely to face a conundrum to select between two different loan arrangements – one with a fixed interest rate and the other with a floating interest rate. Let’s go through the main differences between these two loan variants and how you can go about opting for the one, which is most suitable for you.
Home loans with floating interest rate:
As evident from its name, a floating interest rate home loan keeps changing in terms of the loan’s tenure or the interest charged on the principal amount, from time to time. Normally, home loans with floating interest rate, are the most preferred home loan option, wherein the interest rate is derived from the PLR (prime lending rate) or the base rate of the particular nonbanking finance company (NBFC) or the banking establishment. Any changes made to the PLR or the base rate, leads to a corresponding change in the interest rate of the home loan.
Home loans with fixed interest rate:
These type of home loans can be further subdivided into two kinds:
Home loans with a fixed interest rate for the complete tenure
In this home loan variant, the interest rate gets fixed over the complete tenure of the home loan. As a result, the EMI stays the same throughout the period and the borrower is protected from fluctuations in the interest rates. The interest rate usually charged, is higher compared to the floating interest rate. As a result, the EMI also turns out to be higher, and the borrower’s eligibility for the loan amount may also decrease accordingly. The borrower doesn’t benefit from any drop in the market interest rates.
Home loans with a fixed interest rate for a certain period of time:
In this arrangement, the borrower is provided a home loan at a fixed interest rate for a certain period of time, normally anywhere from 1 to 10 years. The arrangement is reset to the floating interest rate type post expiry of this time period. The interest rate charged in this case is somewhere in the middle of floating and fixed interest arrangement. An evident risk in this type of arrangement is that the loan’s tenure may be increased or the borrower may need to pay higher EMIs after the passage of the pre-decided time period.
The Final Choice:
You must go with a Fixed or floating interest rate home loan for the complete tenure if you are looking to pay a certain fixed EMI every month and want security from interest rate fluctuations. Although, you may need to pay a premium for such arrangement, it’ll more than make up for the peace of mind you’ll get.
On the other hand, a floating interest rate option may be better if you are looking for a higher loan amount, and are not too bothered by the interest rate fluctuations.