To take a home loan is a great commitment and one classic dilemma that all home seekers face is ,whether to opt for Fixed Interest Rate Loans or Floating Interested Rate Home Loans ?? Should you pay more premium in Fixed Interest Rate Home Loans or should we enjoy the changes to interest rate owing to fluctuating market in Floating Home Loans ? Should you ensure peace of your mind by opting for fixed home loans or take a risk by going for Floating Loans ?? These are some of the classic questions, most home-buyers have. This blog-post tries explaining the Pros and Cons for both, Fixed Interest Rate as well as Floating Interest Rate Home Loans.
So the first thing is to understand what is a Fixed Home Loans and a Floating Home Loans ??
Fixed Home Loans:
As the name suggests, we repay the loan amount at fixed interest rate with fixed EMI (Equated Monthly Installment). Interest Rate remains constant during the entire loan-tenure and does not change with market fluctuation.
Pros Of Fixed Home Loans:
- A rise in interest rate will not affect your loan repayment amount or your monthly EMI (Equated Monthly Installment)
- It allows you more freedom and peace-of-mind to plan your financial liabilities accordingly, as you have to pay a fixed EMI, even though market (and hence interest rates) could be fluctuating. Thus it also gives a sense of financial security.
Cons Of Fixed Home Loan:
- The interest rate for Fixed Home Loan is usually 2 % more than the interest rate of Floating Home Loan for same tenure.
- If the interest rate in market decrease by any chance, Fixed Rate Home Loan borrowers will not get any benefit out of it.
Floating Home Loans:
It is also called Adjustable Rate Home Loans. In this scheme, the interest rate is dependent on market and fluctuates according to economic situation in the country.
Pros Of Floating Home Loans:
- If interest rate in market is reduced,you will get immediate benefit of it and you have to repay lesser loan amount than earlier.
- Floating Rate Home Loan is availed at lower interest rate than Fixed Rate Home Loan.
Cons Of Floating Home Loans:
- If interest rate rises, the borrower has two options : The first one is to increase the EMI, keeping the tenure constant or to keep the EMI constant, thereby increasing the tenure. Irrespective of which option you choose for, you are essentially shelling out more money from your pocket.
- There is always an element of uncertainty surrounding your loan amount, especially during volatile market scenarios. So financially you run the risk of repaying an amount, more than you may originally have planned for.
The first thing that we should keep in mind is, this is not a one time decision whether to go for Fixed Rate Loans or Floating Rate Loans. Most of the banks and financial institutions allow their customers to change it afterwards, if they want to. So if you are having a Fixed Interest Rate Loan, you can switch to Floating Interest Home Loan and vice-versa. But, it is not free and there is a cost associated with the same, So it is always better to take a thoughtful decision at the start i.e, at the time of applying for the loan. Try to compare the interest rate that your Bank/Financial-Institution is offering for Fixed and Floating rate home loans and weigh it against your loan-tenure. If you are going for a long tenure and don’t want to take any risk, then a Fixed Rate Home Loan is recommended. But if you go for short tenures, then you should opt for Floating Rate Home Loans. In the short term, interest rates may not fluctuate much, so paying a 2% (or more) premium for a Fixed Rate Loan is not a very good idea. At present, over 90% of the home loan borrowers opt for Floating Rate Home Loans.