What are the Pros and Cons of Fixed and Floating interest rate in home loans?
Fixed Interest Rate in Home Loan:-
A fixed rate home loan is a home loan where the interest rate is fixed over the entire tenure of the loan. The interest rate doesn’t change with market fluctuations. A major component of the monthly installment in the earlier period part of the loan tenure is used to service the interest while the principal is served in the later parts of the tenure.
The interest rate remains fixed irrespective of market conditions, bringing a sense of certainty in the repayment schedule and structure. This loan is suitable for good budgets and those who want a fixed monthly repayment schedule that doesn’t fluctuate.
These loans are usually 1-2.5 percentage points higher than the floating rate home loan. Further, if for any reason the interest rate decreases due a change in the business environment, this loan doesn’t get the benefit of reduced rates and the borrower has to repay the same amount.
Floating Interest Rate in Home Loan:-
In such loans, the rate of interest varies with market conditions. These loans are tied to a base rate and have a floating element. If the base rate is revised upward or downward depending on the market conditions, the floating interest rate is also revised accordingly.
It is cheaper than fixed interest rates when the interest rate outlook is easy. Even if the floating rate goes higher than the fixed rate, it will not be for the entire tenure. Interest rates are cyclical over the long run and hence will fall for some time over the tenure of the loan. Hence floating interest rate helps with savings in terms of amount of repayment depending on which phase of the interest rate cycle a loan in contracted.
Monthly installments are uneven making it difficult to budget. Also, customers benefit by choosing a floating rate home loan only as long as the interest rate does not go beyond 11.5%.