Fixed vs Floating rate home loan: Understand the difference
If you are confused by personal finance terms, jargon and calculations, here’s a new series to simplify and deconstruct these for you. In the tenth part of this series, Riju Mehta explains the difference between the two types of interest rates.
The biggest advantage of fixed rate loan is that since the EMI remains fixed.
Fixed rate As the name suggests, in a fixed rate home loan, the interest rate remains the same for the entire loan duration. This means the tenure and EMIs also remain unchanged, but the initial rate is higher than the floating rate loan. However, some banks convert the fixed rate to floating rate after a specified period. So, read the fine print carefully lest the very purpose of choosing a fixed rate loan is defeated.
Floating rate This rate can vary throughout the term of the loan since it is aligned with the benchmark rate of the lender. This, in turn, depends on the market fluctuations and repo rate changes. This means that if the rate surges, the EMI can increase. If, however, you want the EMI to remain the same, the loan tenure can shoot up significantly.
Fixed vs floating: Find out which rate type suits your needs Pros & cons The biggest advantage of fixed rate loan is that since the EMI remains fixed, your financial planning, cash flow and household budget are not impacted over the long term. In case of floating rates, the EMIs or loan tenure can increase significantly, upsetting your outflow and planning.
On the flip side, since the interest rate is unchanged in a fixed rate loan, even if there is a dip in the benchmark rate, resulting in a lower floating rate, the borrower of a fixed rate loan will be stuck with the higher rate for the entire tenure.
Reset of floating rate home loan EMIs to get more transparent, option to switch to fixed interest rate soon: RBI
