Floating interest rate vs Fixed interest rate

Building or owning a home is a dream for many individuals and families. However, it is an expensive affair. According to various reports, it takes about ₹50 lakhs and more to build a house of 2000 sq. ft with high-quality materials. Considering the cost that goes into building a home, many people take up home loans. 

Home loans are secured loans given by a lender against your residential property. These loans attract less interest rates when compared to personal loans. Almost every lender for a home loan provides the borrower the option to choose between fixed and floating rates. The kind of interest rates you choose will affect your loan tenure and EMI payment plan. 

If you have a need for emergency funds for home renovation, you cannot take a home loan. We advise you to apply for a personal loan in such situations. Check Airtel Personal loans for loans up to ₹8 lacs at low-interest rates and flexible EMI options. 

This article will help you understand the difference between fixed and floating rates. By the end of the article, you will be equipped to understand which rate is better for your home loan. So, let’s get to the learning part!

What are fixed interest rates?

Before getting into the explanation, we need to understand what is repo rate. The repo rate is basically the rate at which RBI lends money to commercial banks or other financial institutions against government securities. The repo rate directly affects the interest rates charged by the banks on loans. If the repo rate is increased by RBI, the interest rate charged on loans will also increase and vice versa. The repo rate is revised by RBI multiple times a year, as and when needed.

Now coming to fixed interest rates. A fixed interest rate on a home loan means that the lending interest rate will remain unchanged for the term of your home loan. It won’t fluctuate according to changes in the repo rate. Even if the repo rate is increased by RBI, interest rates on your home loan won’t change. 

Fixed interest rates also provide borrowers with a better understanding of the installments and loan payment tenure. However, it’s important to check with the lender if they do a reset for a long-term property loan. A reset refers to the switch from fixed to floating interest rates by the lender for a long-term loan.

What are floating interest rates?

Floating interest rates are the opposite of fixed interest rates. Floating interest rates are directly affected by any change in the repo rate. If the repo rate is increased by RBI, the interest rate on your home loan will also be increased. Similarly, if the repo rate is lowered by RBI, the interest rate for your home loan will also decrease accordingly. 

The lender usually defines a calendar for reset of the interest rates. The interest rates are decided according to the repo rate at that particular time.

Remember any changes in the interest rate will not change the EMI amount. It would just change the loan tenure. 

Interest rates on a home loan also depend on your credit score. Do a quick credit score check online to know your credit score and negotiate your interest rate accordingly. 

In a nutshell, do your due diligence before choosing one for your home loan. If you think, the repo rate is going to decrease over the coming years, you can opt for floating interest rates on the home loan to pay less or the same amount of interest. Fixed rates can help you plan your finances better. Talk to various potential lenders to choose what works for you the best. Good luck!