Interest rate is one of the essential factors to consider before opting for a home loan. Home loan interest rate is available in two forms - fixed and floating.
Most lending institutions give you the option of choosing between these two rates, and the choice can be confusing. This is because both have their benefits and drawbacks. This article will discuss all these aspects that will help you help you make the right choice.
What is Home Loan Fixed Interest Rate?
To put it simply, in a fixed interest rate, the rate of interest remains the same throughout the loan tenure. It does not change as per market dynamics. Once the rate is set, the EMIs are calculated based on this rate until you completely pay off the loan.
Advantages of Home Loan Fixed Interest
Latent from Market Volatility: When you procure a home loan on a fixed interest rate, you are shielded against market volatility. Markets never move in a straight line, and several factors affect their performance. However, you need not worry about them when you avail a home loan at a fixed interest rate.
Helps in Better Financial Planning: As the interest rate is fixed, you can better plan your finances. There is no uncertainty about the monthly EMIs that you need to pay, and this helps you plan in a manner that can help you achieve other vital life goals and meet day-to-day expenses.
Peace of Mind: This is another benefit of availing a home loan on a fixed interest rate. You get the much-needed peace of mind as there’s certainty and surety about the EMIs that you need to pay towards your loan.
Disadvantages of Home Loan Fixed Interest Rate
High Rate of Interest: A home loan on a fixed interest rate generally carries a higher rate than a floating one, which increases the EMI to some extent. The figure could be significant in the long run.
Prepayment Penalty: This is another drawback. If you wish to clear your loan faster by prepaying before the end of the tenure, then you are likely to incur a penalty from your lender.
What is Floating Interest Rate?
A floating interest rate, as opposed to a fixed interest, keeps on changing throughout the loan tenure. It is not constant and changes as per market dynamics.
Advantages of Floating Interest Rate
Lower Interest Rates: Floating interest rates are lower than fixed interest rates. Though in the floating regime, rates are not constant, they do not go up higher than fixed rates.
Chances of Reduction in Total Interest Outgo: This is another significant advantage of floating interest rates. If rates drop over time, it reduces borrowing cost and helps you save significantly on the interest outgo.
No Prepayment Penalty: If you wish to pay off your loan before the tenure, you do not need to pay any prepayment charges.
Disadvantages of Floating Interest Rate
Difficult to Plan and Budget: As interest rates change constantly, it’s difficult to budget and plan for expenses coming your way with this loan in place. While the EMI can be low for a couple of months due to lower rates, it can significantly shoot up in the upcoming months if rates rise.
Subjected to Market Dynamics: Floating interest rates are highly dependent on market factors that are beyond your control. At any point in time, one or a combination of factors can shoot up rates, making the loan an expensive proposition.
Now that you know the difference between floating & fixed interest rates and their various aspects, choose the one you feel best suits your budget and requirements. The benefits of floating & fixed interest rates are accompanied by their drawbacks, and it is up to you, the borrower, to make a choice.
You can procure home loans at either a fixed rate or floating rate from Poonawalla Housing Finance as per your choice. The eligibility criteria and documentation are simple, and the rates are also quite competitive. Apply today by filling up this application form.