Interest rate for home loan is an important factor that every borrower weighs carefully before applying for the loan. The banks or financial institutions offering home loans or loans against property, also called home equity, are different depending on whether one is applying for a fixed rate of interest or a floating rate of interest on the loan. Applying for a home loan is the biggest financial decision of one’s life, and there are internal as well as external factors that affect the decision-making process. Therefore, selecting the best interest rates is important, and one must consider the features and benefits of both.
In this article, we have tried to explain the concept of fixed and floating rates of interest for the benefit of the borrower.
Difference between Fixed and Floating Interest Rate
| Fixed Interest Rate | Floating Interest Rate |
| Higher Interest Rate | Lower Interest Rate |
| Not affected by financial market conditions | Affected by changes in the financial market |
| It has Fixed EMIs | EMIs change as per interest rate or MCLR |
| Budget planning is possible | Difficult to budget or manage financials |
| Sense of security | Generates savings |
| Suitable for short/medium term (3-10 years) | Suitable for long term (20-30 years) |
| Risk chances are less | Risk chances are higher |
Fixed Interest Rate
Customers who opt for a Fixed Interest Rate have to repay the home loan in equal and fixed installments as per the tenure of their loan. The advantage of choosing a fixed interest rate is that it would never change even if there are fluctuations in Indian financial market trends.
Floating Interest Rate
Interest rate which keeps on changing as per Indian financial market conditions is termed a Floating Interest Rate. It depends on the base rate offered by multiple lenders, so whenever the base rate changes, the interest rate is automatically revised. In comparison to fixed interest rates, floating rates are comparatively cheaper.
The floating interest rate has become more popular and is considered the first choice by home buyers. Even NBFCs and banks are offering home loan interest (floating) at a lower rate.
Choosing the fixed or floating home loan interest rate option will depend on the preferences, needs and financial profile of the borrower. One needs to consider all the factors discussed to finalizing the best option. The choice of loan has a material impact on the eventual cost of the home.
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