Are you planning on taking a home loan? A home loan would pop a lot of questions in your head, and the most recent dilemma about getting a house loan is whether you have to choose a floating interest rate or a fixed interest rate. If you are not sure about it too, you are in the right place to make this decision. So, here let’s talk about the two main types of interest rates – whether a new home loan applicant needs to choose a fixed one or a floating one.
In order to get going with this topic, it is only fair if we understand both of these aspects in detail.
What is the Meaning of the Fixed Interest Loan?
A fixed interest rate means that the lending rate is fixed for the tenure of the loan. The fixed interest loans give a sense of certainty to you as you would know the monthly installments and the loan tenure before itself.
However, the case of fixed interest rates will give a sense of certainty to you, as you will always know the rate of interest and repayments each month. This factor can help you to pay off the loan much faster and with certainty. It will also assist you with not taking up any market risks.
What is the Meaning of a Floating Interest Rate?
The floating interest rate is when you will perceive that the base rate would stay constant or it would reduce over a period of time. In this case, the interest that is charged on the loan will be the same, or it could reduce. Also, if you are choosing the floating interest rate, this will mean you will be allowed to make prepayments with an excess income, and it will help you to finish the loan faster. This also means the interest rates on the amount you borrowed would be reduced, and when you see a potential rise in your income in the future, you can have a floating interest rate, and it will always work better.
You can understand how each of them works when you calculate EMIs on home loans, and you would mostly see the bigger picture.
In order to know which option is better, it is only right if both of them are put against each other to compare.
What are the Differences Between a Fixed Interest Rate and a Floating Interest Rate
Here is a list of factors that will upfront point out to you the differences between the two kinds of interest rates:
- a) A fixed interest rate on the home loan will always remain the same through the fixed tenure, but the interest on the floating interest rate would change according to the lender’s benchmark.
- b) With the fixed interest rate, they will always be a little higher than what the floating interest rates are. In the case of floating interest rates, they will be slightly lower than what the fixed interest rates are.
- c) When you are comfortable with the existing interest rate and they are reasonable, you can always choose to opt for the fixed interest rate. When you are not very sure about the interest rates going forward, you can choose a floating interest rate.
- d) There is always a prepayment penalty when you want to pay ahead of the tenure that you were signed up on, and the floating interest rate has no penalty charges when you want to pay out beforehand.
Are you Still Not Sure What to Choose?
If you are still not quite sure about the type of housing loan that is suitable for you, then you can choose a combination of the two. Don’t seem confused; that is also a possibility. You can choose between a part fixed and a part floating interest rate on your home loan.
This is especially beneficial if you currently have other loan repayments and your cash flows have been scheduled to fulfill your loan commitments for the first 3-5 years; you may choose a fixed rate throughout this time. After this period, you can choose the floating option for the remainder of the loan’s term.
Future home loan rates are notoriously difficult to forecast. It’s possible that the house loan interest rates will go in the opposite direction of your expectations, leaving you with an undesirable interest rate option. However, you do not need to be concerned about making a poor housing loan decision. Remember that you can convert between a fixed rate and a floating rate housing loan at any moment; lenders will normally charge a small fee for this service.
But, the honest truth is that there are several benefits to a floating interest rate. Want to know them? Here they are.
The Major Perks of a Floating Interest Rate
- You can switch your fixed-rate loans to floating rate loans and vice versa at any moment throughout the term of your loan by paying a modest charge.
- In a variable rate loan, there are no prepayment penalties.
- The choice of a fixed, floating, or hybrid loan is based on one’s specific position, needs, and level of interest rate understanding.
- Customers like floating rate loans because of the flexibility they provide.
- Choose a fixed-rate loan if you are confident that interest rates will rise in the future and want to lock in your loan at the current rate.
Conclusion
Choosing the right kind of home loan is a crucial factor; it is ultimately going to be the hard-earned money that you would be paying, so – there is no fault in making very informed decisions. So, this post would have helped you decide whether your right option is a fixed interest rate or a floating interest rate and what are the by-products of each choice that you make.
