Fixed VS Floating Housing Loan Interest Rates

When applying for a home loan, financial institutions offer loan applicants with two types of housing loan interest rates to choose from, fixed interest rate or a floating interest rate. This decision must be made keeping in mind a variety of factors.

Fixed interest rate

This type of housing loan interest rate means that the interest charged on the principal loan amount remains fixed during the entire period of the loan tenure. Market fluctuations do not affect this type of an interest rate as it remains unchanged. When a borrower with a fixed interest rate is repaying their home loan, the early EMIs mainly pay off the interest charged. The principal loan amount is paid of completely in the final EMIs. This type of housing loan interest rate provides the borrower with sense of security.

Floating interest rate

This type of housing loan interest rate means that the interest charged on the principal changes based on fluctuations in the market. When the borrower opts for a floating interest rate, the benefit he receives is that he can take advantage of low interest rates. When the interest rate on the loan is lower he can pay off a bulk of the loan amount. This makes the repayment of the loan cheaper. This benefit is not available for those who opt for a fixed interest rate.

Drawbacks

The drawbacks of opting for a fixed housing loan interest rate is that it is higher than the interest usually paid by those who opt for floating interest rates. Also, those who opt for this interest rate get none of the benefits available to those who opted for a floating housing loan interest rate. For those who opt for a floating interest rate, the monthly EMIs are uneven which make it difficult to predict and save up for.

Which type of interest rate to choose?

Borrowers who prefer to have a fixed monthly payment. Such individuals will plan in advance and organize their finances to meet their monthly EMIs. It is a completely safe option which provides no risk. A floating interest rate is relatively cheaper for home loan applicants. The constant fluctuations however pose a risk. On the occasions where the interest rate goes higher than that charged as floating rate, it can become costly for the borrower. This type of a housing loan interest rate is ideal for those who don’t mind opting for the risk in hopes to get an affordable loan repayment process.

Based on an individual’s requirements and expectations from their interest rate, they should make a decision. This also requires the individual to conduct a detailed study of housing loan interest rates to make an informed decision.