Difference between fixed and floating interest rates
Buying a house is a big dream for every person, but the home loan taken to fulfill this dream sometimes brings happiness as well as worries. Especially when it comes to choosing the interest rate, i.e. fixed or floating rate. This decision seems small, but it can have a direct impact on your pocket for the coming 1520 years.
Fixed Rate: Stable, but expensive
The biggest advantage of a fixed rate home loan is that your EMI remains the same every month. No matter how much the market fluctuates, your installment remains fixed. This makes budgeting easier and gives you peace of mind. But the price of this stability is high.
Generally the interest rate of fixed rate loan is 11.5% higher than floating. That means, the stability that you like in the beginning can prove to be heavy on your pocket in the long run. If interest rates decrease in future, then fixed rate holders are not able to take advantage of it. In such a situation, you keep paying the same installments while others are paying lower EMIs.
Floating rates: cheap but risky
In floating rate home loans, the interest rates fluctuate depending on the market conditions. It is linked to the repo rate or the benchmark rate of the bank. When interest rates decrease in the market, your EMI also decreases and this is the biggest advantage. But there is also a risk in this, if RBI increases the rates, your EMI may increase suddenly. In such a situation, the monthly budget may get spoiled. However, if seen in the long run, floating rate usually proves to be cheaper than fixed, because interest rates do not always remain high.
Is it beneficial to go from fixed to floating?
If you had taken a loan at a high fixed rate and now the rates have reduced in the market, then balance transfer can be a good option. This means that you transfer your loan to another bank which is offering lower interest rates. Even a rate reduction of just 0.5% or 1% can result in savings of lakhs of rupees over the entire loan tenure. However, banks charge some processing fees or transfer charges in this process, so keep these costs in mind before taking a decision.
Which loan is right for whom?
If you are new to the job, have a long loan tenure and can withstand market conditions, then floating rates may be better for you. This provides flexibility and also increases the potential for savings in the long run. But if you are nearing retirement or want a fixed budget, it would be better to choose a fixed or hybrid loan (in which some years are fixed and the rest are floating). This will also give you stability in EMI and the fear of sudden increase will also be less.