Fixed vs. Floating Home Loan Interest Rate - What’s the difference?

When you apply for a home loan, one of the questions that a lender asks is whether you would prefer a home loan on a fixed or floating interest rate. Figuring out which one to choose can be a bit confusing, however your decision can impact your finances in the future. This article will not only help you clear the confusion between both the terms but also understand the difference between them, so that you can choose the one that best fits your financial situation. 

What is Fixed Interest Rate?

A fixed interest rate on a home loan means that the interest rate on your loan remains constant throughout the loan tenure. In other words, the rate you agree upon at the time of loan disbursement will not change, no matter what happens to the market rates.

Knowing exactly how much to repay each month for the entire loan tenure offers peace of mind to the home loan borrowers. Fixed rates can vary depending on factors like the loan amount, tenure, and the lender's terms, but once locked in, they remain unchanged, regardless of external factors. Let’s quickly take a look at the advantages and disadvantages of fixed rate home loans: 

Benefits of Fixed Interest Rate for Home Loan:

• Stability: You pay the same EMI amount for the entire loan repayment tenure. You won't be affected by market fluctuations, making it easier to plan your finances.

• Peace of Mind: Ideal for borrowers who have a fixed income and want to avoid uncertainty.

Drawbacks of Fixed Interest Rate for Home Loan:

• Higher Interest Rate: Fixed rates are often higher than floating rates, meaning you may end up paying more in the initial years.

• Prepayment Charges: Lenders may charge a fee for loan foreclosure or early repayment.

• Limited Flexibility: If market rates fall, you will still be locked into your original rate.

What is Floating Interest Rate?

Floating interest rate is directly linked to a benchmark rate, such as Repo Rate and MCLR (Marginal Cost of Funds based Lending Rate). This means that the interest rate on your loan will fluctuate in line with changes in the benchmark rate. When the benchmark rate rises, the interest rate of a loan will also go up, and when the benchmark rate reduces, your interest rate also goes down.

Since the floating interest rate is dynamic, your monthly EMI (Equated Monthly Installment) will change as well. Let’s quickly take a look at the advantages and disadvantages of floating rate home loans: 

Benefits of Floating Interest Rate for Home Loan:

• Lower Initial Interest: Floating rates often start off lower than fixed rates, meaning you may pay less initially.

• Benefit from Rate Drops: If the benchmark rates go down, your interest rate and EMIs will reduce accordingly.

• Flexibility: Floating loans offer greater flexibility if you plan to prepay or foreclose the loan.

Drawbacks of Floating Interest Rate for Home Loan:

• Uncertainty: Since the rates are tied to market conditions, your repayment amount can increase any day.

• Budgeting Challenges: The fluctuating nature of floating rates makes it harder to budget for future expenses.

Difference Between Fixed vs Floating Interest Rates

When comparing fixed vs floating interest rates, there are several key differences to consider. Here’s a breakdown:

Feature	Fixed Interest Rate	Floating Interest Rate
Rate Stability	Same for the entire loan tenure	Changes based on market conditions
EMI Amount	Fixed, unaffected by market changes	Fluctuations with interest rate changes
Loan Tenure	Predictable and stable	May decrease or increase based on changes in interest rate
Rate of Interest	Usually higher compared to floating rates	Generally lower, but subject to change
Prepayment and Foreclosure Charges	Often higher charges for prepayment	Flexible in terms of prepayment options
Risk Factor	Low; no exposure to market fluctuations	High; impacted by market volatility

Which Option is Better for Home Loan Borrowers?

Which one to choose? Fixed or floating interest rate mainly depends on the risk tolerance capability, financial standing, and preferences of a home-loan borrower. Here's a guide to help you choose the right option:

1: Consider Your Financial Stability

• If you have a stable income and prefer predictable payments, a fixed interest rate home loan might be a better choice. It will give you the confidence that your EMIs won’t increase even if the market conditions change.

• If your income fluctuates or you can adjust to changing rates, a floating interest rate home loan may suit you, especially if you're comfortable with the risk of rates increasing in the future.

2: Market Conditions

• If the economy is experiencing low or declining interest rates, a floating interest rate home loan might be more advantageous. You stand to benefit from lower rates as the benchmark rate decreases.

• If market rates are rising, a fixed interest rate can protect you from sudden hikes, allowing you to lock in a lower rate.

3: Loan Tenure

• If you're taking a home loan for a shorter tenure, you might be able to ride out fluctuations in interest rates with a floating rate.

• For longer tenures, a fixed rate home loan may give you the security of knowing exactly how much you’ll pay every month, regardless of how the market changes.

4: Flexibility and Prepayment Options

• Floating loans often offer more flexibility when it comes to prepaying or foreclosing the loan. You may also have the option to switch to a fixed rate later, depending on your lender’s terms.

• Fixed rate loans usually come with stricter prepayment penalties, so if you anticipate paying off your loan early, this could be a significant consideration.

Fixed vs Floating Home Loan Interest Rate: Which one is better?

In the long run, fixed rate home loans tend to be more expensive than floating rate loans. While floating interest rate home loans may start off cheaper, they have the potential to increase over time if the benchmark rates rise. A floating rate loan can be a good option if you plan to pay off the loan faster or are comfortable with rate fluctuations.

However, if you prefer stability and want to avoid the risk of increasing rates, a fixed interest rate home loan might be the better option, despite the higher initial rates. The key here is balancing your tolerance for risk with your ability to absorb rate changes.

Can we switch between floating and fixed interest rates?

Yes! You can switch between floating and fixed interest rates anytime during your loan repayment tenure. All home loan borrowers can avail this facility. However, banks or lenders may charge a fee to change the rate of interest from fixed to floating rate and vice versa. However, do not rush to change the interest rate. Weigh in all the pros and cons of making the switch and then make a decision. 

Choosing Between Fixed and Floating Interest Rates

In simple terms, both fixed and floating interest rates have their pros and cons, and the right choice largely depends on your personal financial situation, risk appetite, and the prevailing economic environment.

• If you value certainty and a predictable budget, a fixed interest rate home loan might be the way to go.

• If you’re more flexible and open to the potential benefits of a falling interest rate, a floating interest rate home loan could be the better option.

It’s always advisable to evaluate your own situation, consider market conditions, and consult with financial advisors or home loan experts before making the final decision. By understanding the difference between fixed and floating interest rates and weighing the pros and cons, you’ll be better equipped to make an informed decision that suits your long-term financial goals.

For more such informative blogs and articles, keep reading Inframantra. Inframantra is one of the best real estate companies in Gurgaon, Delhi, Noida, and Pune. Here at Inframantra, you get to explore a wide range of premium residential properties and avail end-to-end home-buying services without worrying about brokerage. Our team is with you every step of the way ensuring that your home-buying experience is seamless and hassle-free.