There are two types of home loans viz. Floating Rate Home Loans and Fixed Rate Home Loans. The EMI of a floating rate loan changes with changes in market interest rates. The rate of interest on fixed-rate home loans is fixed either for the entire tenure of the loan or a certain part of the tenure of the loan. In the case of a home loan for the entire tenure of the loan, the EMI due to the bank remains constant. If a bank offers a Loan that is fixed only for a certain period of the tenure of the loan, the bank may charge a higher rate at market-adjusted interest after the lock-in period.
Usually, bankers will have a better view about in which direction interest rates are moving in the near future. When a fixed rate is higher than the floating rate, it is an indication that the bank believes that rates will rise in the future. If that happens banks earn more through the floating rate option of the borrower as they reset the floating rate interest. If the fixed rate is priced lower than the floating rate, the bank is anticipating a fall in interest rates. It helps the bank to lock into a higher fixed rate. It also gives a good clue to the customers about bankers’ view on expected rates in the future.
Some of the key differences between fixed-rate and floating rates of interest are listed below.
| Fixed-Rate of interest | Floating Rate of interest |
| The bank bears the risk of future rates going up | Borrower bears the risk that the future rates could go up. |
| Interest rate remains fixed irrespective of the market conditions. | There can be situations when the floating rate of interest can exceed the fixed rate. However, if the interest rates were to fall in the future, borrowers will benefit from the reduction in repayment tenure. |
| Fixed-rate offers the ideal protection to the borrower, especially against volatile conditions. | Floating rates do not offer protection to the borrower, especially against volatile conditions. |
| Fixed Home Loan interest rates are best for those who are good at budgeting, as the interest rate is pre-fixed for the tenure of the loan which provides a known cash outflow for a known period. | Budget planning of the borrower from the monthly income may be disrupted due to the fluctuation of interest rates. |
| The interest rate is pre-fixed for the tenure of the loan. Provides a known cash outflow for a known period | It is possible that the borrower may pay an interest rate higher than the fixed rate. |
| If the fixed rate of interest for the entire tenure of the loan is fixed, there will not be any change in the EMI as well as tenure remain unchanged. | Floating rates are affected by the fluctuation of market rates. The higher the interest rate, the higher will be your EMI or the loan period will be extended beyond the pre-fixed tenure of the loan. |
| If the fixed-rate remains higher than the floating rate for the entire tenure of the loan, the borrower has to permanently pay the higher rate of interest compared to the floating rate of interest. In that case, the fixed-rate option is a major loss to the borrower. | The borrower will be lucky to close the loan before the pre-fixed tenure of the loan if the floating rates are going south direction for a longer period. |
Normally, for Shorter loan repayment duration, floating rates make it an excellent choice. However, if certainty and security are prime considerations, a fixed rate Home Loan will be the best option although it won’t come to the customer without the premium on interest rates. It is up to you to decide on what interest rate suits your best interest. Confirm from your bank whether the loan is sanctioned with a floating rate of interest or fixed rate of interest for the entire tenure of the loan. The rate of interest you have to pay will vary accordingly.
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