Difference Between Floating and Fixed Home Loan

Home loans make us fulfil our dreams, but it requires thorough research and planning to continue on the profitable side after making an application for one. The tenure and related interest rate play an essential part in the entire process. Higher interest rates can put a burden on your monthly finances, whereas lower interest rates can increase your loan tenure and there are chances that you will end up paying a large sum of money to the bank. 

Opt for home loans where the principal amount and interest rates are within your budget. However, there are variations in the category of interest rates, namely Fixed Interest Rates and Floating Interest Rates. Organisations offering home loans let their customers choose accordingly. But we need to get a clear overview of the mentioned concepts to build our dream house while maintaining financial stability in the long run.  

Continue with the article to determine the differences between fixed and floating interest rates before finalising either one.

What is a fixed home loan rate of interest?

Fixed-rate of interest means that the borrower will continue to pay an equal amount of instalments till the loan amount gets fully repaid. The particular arrangement is independent of the prevailing market conditions, assuring hassle-free loan repayment from the borrowers’ end. 

People prefer to go for the fixed rate when the market is down. It allows them to block or fix the interest rate at the lowest price, and it stays low throughout the loan tenure even when the market sees a rise in the prices. So if you are thinking about applying for a home loan in the near future, you can wait till the financial market faces a significant drop down in interest rates. Conduct thorough research on the present market conditions and choose the best available option accordingly.

What is a floating home loan rate of interest?

The floating rate of interest, also known as volatile interest rate, keeps on changing according to the present market conditions. The lender decides the base rate of the home loan after considering the market situation. Therefore, whenever the financial market undergoes the slightest of change, it brings in significant alterations in the base rate, which in return influences the interest rate of an individual loan.

Floating interest rates are generally cheaper than the fixed interest rates. Depending on the market conditions, the fixed interest rate remains 1% to 2.5% higher than the temporary interest rates. Considered to be rare case scenarios, floating interest rates can go higher than the fixed rates in case the prevailing market conditions undergo drastic changes. Home loans remain active for a long period, so lower interest rates can reduce the overall amount up to a significant number.

Nowadays, more people are opting for floating interest rates over fixed ones, because they are more comfortable with the former and its cheaper interest rates. Banks and other lenders are also offering lower interest rates to attract more people to take home loans from them.

How to choose?

Market conditions possess a direct influence over the floating rates. In contrast, fixed interest rates are independent and predictable. If you are certain that the present interest rates are reasonable and also believe that there are chances for them to rise in the near future, fixed interest rates are a safe option to procure.

In case you are good at predicting the market conditions and have a stable income, to take care of the monthly finances, floating interest rates can be a suitable option. 

Prepayment Penalty

If you are prepaying the loan amount, various factors need to be put under consideration. The bank always charges a hefty amount as a prepayment penalty if you are paying interest with a fixed rate. But this amount gets considerably minimal in the case of floating rates.

Can you shift from floating to fixed interest rates or vice-versa?

Yes, you can shift from floating to fixed interest rates or vice-versa. Lenders usually charge a conversion fee of up to 2% of the entire loan amount to make that possible.

When you are applying for a home loan, choosing the right type of interest rate can make a lot of difference in the long run. This way, you will not end up paying more than what you have already decided. It is always recommended to conduct detailed research on the current market trends before finalising the loan interest type, tenure and monthly EMI’s. Consider your own financial standing before proceeding with the loan interest rates.