Home loans available from banks have two options either you can opt for a fixed interest rate option or a variable (floating) interest rate option. In the Fix Interest rate option rate of interest remains the same throughout the home loan. In the floating rate option rate of interest varies (decided by the bank based on the declaration by RBI about the Reverse Repo Rate) This rate varies every quarter.
If you are planning to take a home loan to purchase a home “BIG” question must be arising in your mind about whether to choose a fixed or floating rate option. In this article, we will provide you guidance about whether is it good to opt for a fixed or floating-rate home loan option.
Fixed interest rate home loans
As the name indicates in this type of loan rate of interest remains the same over the loan period, every month one has to pay EMI on a fixed interest rate decided during the disbursement of the loan. As you may be aware during the early years of loan tenure the majority of monthly payments EMI goes into interest components and a small amount goes to principal components.
Advantages of fixed-rate home loans
If anyone opts for a fixed rate home loan option then he has an advantage over a floating rate in a manner that if the market pressures interest rate for upward movement then also this rate will be unchanged & the borrower has to pay a fixed EMI. This option is best suited for a person who wants to keep himself secure from varying interest rates and wants to keep a fixed amount/fixed tenure for the payment of a loan.
Disadvantage of fixed-rate home loans
The main disadvantage of fixed-rate home loans are its the rate is usually 1.5% -2 % more than floating-rate home loan options. The second thing by any chance interest rate in the market falls the fixed rate home loan does not get the benefit of this reduced rate and the rate remains the same. Fix-rate home loan options are best suited if the economic scenario depicts that the rate will rise.
Another option available is the fixed rate option for some years which will be converted into to floating rate option.
Floating rate home loan
In this loan option interest rates are tied with base rates (Prime Lending Rate) and floating elements (usually linked with RBI Reverse repo rate) , if that base rate varies home loan interest rate varies.
Advantage of floating interest rate home loan
Floating rate home loans are available cheaper by 1.5% -2% compared with fixed rate option, meaning if you are getting a home loan by the bank with 11 % then the fixed loan may be offered with 13%. In this case if the floating rate increases by 1.5% or so then also your loan will be at 12.5%, the Floating rate does not always rise over some time it will fall also which brings an advantage for floating rate customers as EMIs will average out.
Disadvantage of floating interest rate home loan
The disadvantage in the case of the floating rate option is monthly investment EMI / Tenure although is fixed at the start of the loan will vary over a period of time as the rate may increase/ decrease. If the rate increases you have two options keep paying the same EMI and increase tenure or loan or increase EMI so that tenure will remain the same. In both cases, you will be paying more money. Another disadvantage is that you cannot predict exactly how much amount you need to pay for a home loan.
Home loan customers mostly select floating-rate home loans to take advantage of floating rates, data shows that 80% of people opt for home loans with floating rates. It is up to the borrower to decide the option rate of interest but keeping in mind the current situation fixed-rate home loan will provide more advantages of security but one has to see that he is not paying more premiums on interest rates.