Explained: Fixed and Floating Rates of Interest For Homes

Fixed and floating rates of interest are two common terms that borrowers have to contend with when they apply for home loans. Buying a home, as we all know, is the culmination of a dream and home loans help make it possible. While banks and other financial institutions sanction home loans for property purchases, many borrowers remain anxious about the rates of interest. These are crucial components of loans, since they influence the overall payment made by the borrower on the money borrowed for buying the home. Hence, the monthly EMIs are also influenced by the interest rates. 

Fixed and floating rates of interest are two kinds of interest rates that are offered to borrowers by several financial institutions. Here is a closer look at what they mean and some inputs on how to choose between them. 

What are Floating Interest Rates? 

Here are some pointers that will help borrowers understand floating rates of interest. 

• These interest rates are adjustable and subject to change, depending on market fluctuations and repo rate changes. 
• These interest rates come with benchmark rates stated by lenders which are subject to market movements. Hence, the rates of interest also vary throughout the loan period. 
• Lenders usually set calendar periods for resetting floating rates of interest. This could be on a quarterly, half-yearly, annual, or monthly basis. 
• In case the rate of interest goes up, the loan tenure increases and it comes down in case the interest rate comes down. The EMI is not changed in this case. 
• However, borrowers can also choose the option to change their EMIs based on interest rate fluctuations, i.e. EMIs increase with increases in interest rates and vice-versa. 
• Floating rates of interest are beneficial in scenarios where market interest rates fall and are projected to remain steady or keep falling over the next few years. Borrowers may initially get lower interest rates if they choose this option as compared to fixed rates of interest. 
• However, the interest rates may increase again, depending on market conditions. Hence, for those who wish to be sure about the amount they pay, opting for fixed interest rates may be more viable. 

What are Fixed Interest Rates? 

Here are some pointers to help borrowers get a better idea of fixed interest rates. 

• Fixed interest rates remain the same and unchanged throughout the loan tenure, irrespective of market movements and repo rate changes. 
• The interest rate is pre-agreed between the borrower and lender at the time of home loan approval and sanctioning. 
• The loan amount stays unaffected by inflation rates and other fluctuations in the market. 
• Borrowers often choose fixed interest rates to be certain about the amount that they have to pay each month as EMIs and the overall loan outgo. 
• Taking a home loan at a fixed interest rate is a good choice when the repo rate increases and banks also start scaling up their rates accordingly. It may be a better option if there is an upward projection of rates based on market trends. 

Fixed and Floating Rates of Interest on Home Loans- How they Are Different 

Here is a closer look at the key differences between fixed and floating rates of interest for a better idea. 

Summing Up 

Borrowers should always take the advice of their trusted financial advisors before choosing fixed or floating interest rates on their home loans. Banks are also good sources of guidance regarding interest rate movements and future projections. Taking a little time and investing some effort into the decision is worth it, since it will influence the overall loan outgo and monthly EMI payments alike.