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Fixed Rate or Floating Rate: Which One Should You Opt For?

Adhil Shetty

Before making a decision between fixed and floating rates, go through the fine print and choose the one that you are most comfortable with.

Fixed Rate or Floating Rate: Which One Should You Opt For?

Buying a house with a Home Loan is a fairly long exercise. Hence, it is important that when you choose a Home Loan, you spend a good amount of thought on deciding whether to opt for a Fixed Rate Home Loan or a Floating rate Home Loan. Both fixed as well as flexible rate home loans have their benefits.

However, these two rates often leave home loan aspirants in a fix about deciding on the right interest rate option for their loan. Deciding about either of the above depends on your financial health, your loan repayment capacity, the prevailing interest rates as well as the quantum of the loan amount.

Understanding Fixed Rate Housing Loan

Fixed rate home loan as the name suggests offers a fixed rate of interest for the housing loan. The rate of interest is fixed as per the prevailing economic scenario and decided by the banks based on their base rate or Marginal Cost Of Funds-based Lending Rate (MCLR). The banks usually offer fixed interest rates to customers for a limited number of years and not for the full tenure, making a customer open to floating interest rates once the period for the fixed rate is over. The period can vary from 2 years to 10 years as per the bank and the loan amount.

The biggest advantage of a fixed rate Home Loan is the constant loan EMI irrespective of any market fluctuations. So, if you are someone who likes to plan their financial outflow each month, a fixed rate Home Loan ensures that you are certain of your loan EMI outgo for each month. On the downside, the interest rates for fixed rate Home Loans are on an average 1 to 2% higher compared to floating or flexible housing loan options.

Floating Interest Rate Home Loans

A floating rate Home Loan offers an interest rate linked to the bank’s base rate which is in turn linked to the RBI’s repo rate. As per the prevailing economic parameters, each bank fixes its base rate and then offers interest rates for various loans including Home Loans.  Floating interest rates are usually lower than fixed rate Home Loan making them more cost-effective in the long run. On the downside, the EMI component remains variable and a borrower is unlikely to plan the exact EMI outgo especially in turbulent economic phases.

Which One Should You Choose?

Fixed or flexible is a decision that must be exercised taking into account your financial planning. If you are someone very focused on ensuring a fixed EMI outgo, a fixed rate Home Loan can be a good option. However, before going for the fixed Home Loan rate, you should be wise in checking if the fixed rate is for the entire tenure or only for a few years.

While going for a floating Home Loan rate, always remember that the interest varies with the market fluctuations, which means you will be subjected to a base rate and a floating element will be added. So, with the change in base rate, your floating rate will also vary.

You can pick and choose the amount of loan for both fixed and floating parts of your loan. So effectively in the event of a rise in interest rates, you can foreclose the floating rate component and go in for a fixed rate home loan. If the interest rates are falling you can pay a small conversion fee to ensure that the fixed rate component is converted to floating. On the downside, such conversion can only be opted for once during the loan tenure.

Therefore, it would be wise to consider your finances and your comfort in repaying before choosing between Fixed and Floating Interest Rate of Home Loans.

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