Fixed vs Floating Interest Rate: Key features and know which is better for home loan

Everyone dreams of buying their own house; however, it is not easy for everyone to buy one without a loan. Apart from finance, one also needs to consider other aspects like amenities, locality, and connectivity when buying a home.
 
While banks and other financial institutions are eager to provide a loan, fluctuating interest rates are a reason for anxiety for the borrower. Home loans come with either floating or fixed interest rates. The decision to pick one over the other is critical for a borrower since it influences the EMI.
 
Before knowing which interest rate is better for a home loan, let's understand what fixed and floating interest rates are.
 
Floating interest rate: A floating interest rate refers to an interest rate that changes depending on market conditions. This form of interest rate is based on the base rate supplied by numerous lenders, and once the base rate changes, the interest rate is immediately revised.
 
Fixed interest rate: A fixed interest rate loan has an interest rate that does not change during the loan's duration. This enables the borrower to precisely forecast future payments.

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Here are a few differences between floating and fixed interest rates-

• Fixed interest rates are usually higher than floating interest rates.
• Fixed interest rates are not affected by any market conditions, while this is not the case for floating interest rates.
• EMIs don't change under fixed interest rates, while EMIs change in floating interest rate loans as per the interest rate, or MCLR (marginal cost of funds based lending rate).
• Opting for fixed interest rates makes your budget planning easy, while it's difficult to manage finances when you have a floating interest rate.
• A fixed interest rate is suitable for short-term (3–10 years) loans, while a floating interest rate is better for long-term (20–30 years) loans.

Should you opt for a fixed or floating interest rate for a home loan?

When to take a home loan on fixed interest rate

It may depend on your monthly EMI. It should ideally be between 25 and 30 per cent of your monthly take-home pay.
You anticipate increased interest rates in the future and would like to lock-in your house loan at the current rate.

Opting for a fixed-rate home loan provides you with a sense of assurance since you know what your repayments will be from the start, allowing you to budget effectively and organise your finances. So your loan length, EMI requirements, and total interest outflow are all quite predictable.
 
Fixed interest rates are usually better for a short period.

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When to take a home loan on floating interest rate

Nowadays, floating interest rates are becoming more common and are considered the top option for home buyers. Even banks and NBFCs are providing house loan interest (floating) at a low and appealing rate. Floating rates are cheaper than fixed interest rates. Fixed interest rates are 1–2.5 per cent higher than floating interest rates. The floating interest rate fluctuates in response to market developments, so any increases or decreases are transient. Because a house loan involves a long-term commitment with the lender, it can be difficult to plan for financial obligations.

This is better for long-term loans.

According to a PNB Housing Finance spokesperson, "The decision to choose between a fixed or floating interest rate for a home loan is arguably one of the most consequential in an individual's financial planning journey and requires careful consideration of multiple factors. A fixed-rate loan offers stability and protection against interest rate fluctuations for a pre-determined period, providing peace of mind to borrowers. On the other hand, a floating interest rate loan may offer slightly lower interest rates dependent on the overall macroeconomic situations, but it also entails the risk of increased payments if interest rates rise."

Conclusion

If you are a first time loan borrower and confused between both interest rates, you can opt for a fixed interest rate and later change to a floating interest rate as per the requirement. However, you may be levied a charge, and the fees may be up to 2 per cent of the loan amount.
 
Therefore, it is always better to do proper due diligence before choosing an interest rate type.

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