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.
Here are some pointers that will help borrowers understand floating rates of interest.
Here are some pointers to help borrowers get a better idea of fixed interest rates.
Here is a closer look at the key differences between fixed and floating rates of interest for a better idea.
Fixed Interest Rates |
Floating Interest Rates |
The interest rate stays fixed throughout the loan tenure |
The interest rate changes based on the lender’s benchmark rate in proportion to repo rate changes and market fluctuations |
Fixed interest rates are slightly higher than floating interest rates |
Floating interest rates are a little lower than fixed interest rates, especially for shorter home loan durations |
Suits those who are unsure about market movements in the long term and want to repay loans with a fixed amount and EMI payout |
Suits those who are confident about interest rates being on a downward spiral for a longer duration and also unsure about where rates of interest may head in the future |
Ideal for those looking to repay loans within 3-10 years on average |
Ideal for younger home loan borrowers looking to repay within 20-30 years |
May come with prepayment penalties |
May come without prepayment penalties |
Helps with better financial budgeting and planning |
It is sometimes hard to chalk out a financial plan since the loan tenure/EMI amount may change periodically |
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.
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