Among the many decisions you make when taking a home loan to buy the property of your home, one of the key steps is choosing between two different types of interest rates. It is a decision that may not seem urgent at first but can have a long-term impact on your loan journey. Many borrowers do not pay much attention to it in the beginning, but later realise how much difference it can make. In this blog, we take a closer look at this choice and help you understand what to keep in mind before deciding.
Understanding fixed home loan interest rate
A fixed home loan interest rate means that your interest rate stays the same for a set period, usually for the full loan tenure or for a few years, depending on the lender’s terms. Your EMI (Equated Monthly Instalment) remains unchanged during this period, even if market interest rates go up or down. It brings predictability and helps with easy financial planning because you know exactly how much you have to pay every month.
Choose fixed home loan interest rate when:
- You prefer stability in repayments: If you want your EMI amount to stay the same every month without any surprises, fixed rates are a good choice.
- You are planning a long-term budget: If you have planned your finances carefully and want steady outflows, fixed rates help you stick to your plan.
- Interest rates in the market are low: If current home loan rates are already low and you think they may rise in the future, locking in a fixed rate can save you money over time.
- You have a fixed income source: Salaried individuals or those with a stable monthly income often prefer fixed rates to avoid financial strain if market rates climb.
- You are taking a loan for a long tenure: Fixed rates give peace of mind when you are committing to a long repayment journey, like 15 or 20 years.
- You are risk-averse: If you do not want to worry about market movements or economic conditions affecting your EMI, fixed rates offer that mental comfort.
Understanding floating home loan interest rate
A floating home loan interest rate is not constant. It moves up or down based on changes in a benchmark rate decided by the lender, usually linked to external factors like the RBI’s repo rate, which is because of various economic factors. Your EMI may increase or decrease during your loan tenure depending on how interest rates move in the market.
Choose floating home loan interest rate when:
- You believe interest rates will fall or stay low: If you expect market rates to drop in the coming years, floating rates can help you pay lower EMIs.
- You want to benefit from market movements: When rates fall, your EMI reduces automatically, helping you save on interest without any effort.
- You are okay with some ups and downs: If your income can handle small changes in monthly payments, floating rates give you flexibility.
- You plan to prepay your loan early: If you are confident that you will close your loan in a few years through prepayments, a floating rate can save you penalty costs because many lenders allow easy prepayments on floating rate loans.
- You are taking a loan for a shorter tenure: When your loan is for 5 to 7 years, small interest rate fluctuations may not affect you much and floating rates might turn out cheaper.
- You want to keep initial costs low: Generally, floating rate loans have lower starting interest rates than fixed rate loans.
Closing thoughts
If you want your EMI to stay steady throughout and prefer better control over your monthly budget, using a home loan EMI calculator can help you plan better with a fixed interest rate. You will know exactly what you need to set aside each month, without worrying about market changes.
Floating interest rates work differently. They are usually reviewed every quarter, semi-annually or annually, depending on the lender’s reset policy and changes in benchmark rates. Your EMI may go up or down based on these reviews.
If you feel at any point that the fluctuations are making repayments difficult, you have the option to switch from a floating rate to a fixed rate. However, lenders typically charge a conversion fee for this, so it is important to check the terms carefully before deciding.