Is the interest rate offered on your home loan fixed or floating?

Let’s first understand the meaning of fixed interest rates and floating interest rates. home loan

Fixed interest rate:- As the name suggests this interest rate implies that the lending rate is fixed. A fixed interest rate is a rate that is levied on a liability, such as a mortgage, credit card, loan, or corporate bond, at a constant rate. It is applied to the whole term of the loan/ liability or a portion of it.

A fixed interest rate on loans is a type of loan in which the interest remains constant for the duration of the loan. For long-term loans, most borrowers prefer fixed-rate loans. As you can correctly forecast future costs and monthly payments.

In other words, the EMI composition (principal + interest) is the same throughout the loan tenure.

Floating interest rate:- Also known as the variable rate, adjustable rate, refers to a debt instrument such as a loan, mortgage, bond, or credit, that does not have a fixed interest rate of interest over the life of the instrument.

It is the opposite of a fixed interest rate, where the interest rate remains constant throughout the life of the debt. Loans, such as residential mortgages, can be acquired at both fixed interest rates as well as at floating interest rates that periodically adjust per interest rate market conditions.

Fixed interest rate VS Floating interest rate

Depending on the market fluctuations, interest can decrease or increase in the floating interest scenario while in the fixed interest rate scenario, the interest remains constant throughout the loan period irrespective of the changes in market conditions.

• If you opt for a fixed interest rate for your home loan, it remains the same for a major portion or the entire tenure of the loan, subject to the conditions of your loan agreement. On the other hand, if you opt for a floating interest rate, the rate of interest on the home loan changes.

• The fixed rate of interest is slightly higher compared to the floating rate of interest, which is typically lower.

• Choosing your fixed or floating interest rate on the home loan depends upon the market conditions. If you are confident that the prevailing rates of interest are reasonable and you believe that the rate of interest will increase in the future, it is better to opt for a home loan with a fixed interest rate. However, if you are skeptical or unsure about the market conditions and believe that the interest rates can fall in the future, it is better to opt for the floating interest rate

•   You are usually charged a prepayment penalty on a fixed interest rate, whereas the chances of a prepayment penalty on a floating rate of interest are minimal. There are several factors that affect this including the lender, the tenure in the loan when you decide to repay the loan, and so on.

Benefits of floating interest rate:-

The benefits of a floating interest rate are as follows:

1. Floating interest rates are usually set at 1% to 2.5% lower than the fixed interest rate offered by the same lender.
2. The floating interest rates offered by a bank or non-banking financing company are usually lower than the fixed rates it offers its customers. Therefore, it means that even if the floating interest rate increases, it can still be less than the previous fixed interest rate offered.
3. In case the floating interest rate exceeds the interest rate, it will not be for the entire loan tenure. There are chances that the floating rates might come down after a certain period of time.