Purchasing a house involves taking a series of long-term decisions. A crucial decision that one has to make is how they want to fund their new address. One of the most common ways that most people do it is with the help of a home loan.
The next step of the process is to choose between fixed and floating interest rates so that you can get the best home loan interest rates. It is a monumental decision, which is going to decide the rate of interest you will pay throughout the repayment tenor. Understanding fixed, and floating interest rates can go a long way in helping you secure the lowest home loan interest rate in India. As such, it is paramount that you understand these two types of interest rates comprehensively and opt for one that aligns with your requirements.
What is a Fixed Interest Rate Home Loan?
The interest rate of the home loan is determined at the time of availing it. This rate remains unchanged across the entire tenor. The most significant feature of this type of interest rate is that it remains completely unaffected from any fluctuations in the market or government/ apex bank policies.
The most significant advantage of a fixed rate loan is the certainty that it brings with itself. A borrower knows the exact amount that is due every month, and they can plan their expenses accordingly. However, the interest rate is generally higher by 1.5%-2% compared to floating rates.
As these loans are immune to market fluxes, you are safe from any unpredictable rise in interest rates that can potentially affect your financial stability. On the flip side, this same stability does not let a borrower enjoy the benefits if the interest rate goes down at any time.
You should opt for a fixed interest rate home loan if:
The current interest rate is comfortable for you; do note that your income to EMI ratio shouldn’t be more than 30%.
You foresee the interest rate rising shortly.
You prefer security over uncertainty even if it costs you a little extra.
What is a home loan with floating interest rates?
Home loan interest rates that are dependent on the market scenario is termed as floating interest rates. It is volatile and may change every month. Yet, the floating interest rates are usually the lowest home loan interest rates available in the market.
The basic premise of this type of interest rate is that it fluctuates with the base rate that is aggregated from several lenders. The MCLR rate, affixed by the RBI, also plays a crucial role in determining the rate of interest for this type of loan.
Floating interest rates are an excellent option for those who do not mind the uncertainty of not knowing the exact monthly instalment they have to pay. The only point of concern is that the interest rate may skyrocket on a particular month, making the monthly EMI difficult to meet. However, this high rate of interest is not fixed and will likely come down in the following months.
Most financial institutions offer both these types of interest rates on home loans. Some lenders even offer hybrid interest rates combining both fixed and floating formats.
This comprehensive guide on how to get a home loan with the best interest rates will help you decide between fixed and floating interest rates. Whichever you choose, read the fine prints carefully before you finalise.