Buying a house is the long-term commitment and one of the crucial decisions that one makes in a lifetime—just like that, knowing about interest rates holds a significance before availing a home loan. To get the best banks for a home loan, one must compare home loan rates of various banks and non-banking financial institutions. Apart from that, it is also vital to know about types of home loan interest rates as it has a long-term impact on your EMI.
There are two types of home loan interest- Fixed and Floating Home Loan Interest Rates.
What is a fixed rate home loan?
As the name suggests, the fixed-rate home loan rate does not change over a home loan tenure and remains the same throughout the term irrespective of market fluctuations. Under a fixed rate home loan, the interest component of the home loan is significantly higher than the principal component in the initial years. However, these changes in the latter stage, when the principal component is larger than the interest component of EMI.
What is a floating rate home loan?
A floating rate home loan does not remain the same throughout the home loan tenure. The home loan rates are linked with the base rate, which changes as per the market conditions. It implies that with the change in the base rate, home loan rates also change under floating rate home loans.
Difference between fixed rate and floating rate home loan
|Fixed Interest Rate||Floating Interest Rate|
|Interest Rate is higher on fixed rate home loans.||Home loan rates are lower in case of Floating Interest Rate.|
|Fixed Rate Home Loans are not affected by financial market conditions||Floating Rate Home Loan gets affected by changes in the financial market|
|EMIs are fixed in case of fixed rate home loans.||EMIs change as per interest rate or MCLR rate in the case of floating rate home loan|
|It is easy to manage Budget under fixed rate home loan||Borrowers may find it difficult to do budget planning in the case of floating rate home loans|
|Fixed rate home loans ensures a sense of security to the home loan borrowers||Floating rate home loans help to generate savings.|
|Fixed rate home loans are mostly suitable for short/medium term ranging up to 10 years||Floating rate home loans are suitable for long term up to 30 years.|
|There is lesser risk in the case of fixed rate home loan rate||There is higher risk for the borrowers in the case of floating rate home loans.|
Which should you opt?
Home loan borrowers can prefer fixed-rate home loans if they are confident that the home loan rates will increase in the future and similarly borrowers can opt for floating rates if they are assuming that the rates may go down in the future.
It is also easy for the borrowers to switch from fixed home loan rates to floating rates. However, they may have to bear specific charges, which may go up to 2% of the home loan rates. This conversion fee varies from lender to lender.