Should you opt for a fixed-rate or a floating-rate home loan?

Buying a house is like a dream come true for many people and with it comes a lot of responsibility. One of the important responsibilities could be repaying your house loan at regular intervals. But what’s more important is what kind of interest rate you prefer so that the repayment doesn’t bother you at all. Whether it is a fixed rate of interest or a floating rate of interest, you have to decide which one to pick. 

In this article, we will assess both sides, see their pros and cons, balance it out, and let you decide which one is better between the two. 

What is a fixed rate of interest when it comes to a home loan? 

A fixed rate of interest means that the interest rate the lender charges you remains constant throughout the repayment tenure. This means if the bank charges you a 10% interest rate on your home loan for 20 years, the interest rate remains 10% throughout 20 years. 

There is always an option for you to set a fixed rate of interest for 3, 5 or 10 years but that cannot be frequently done. This is one of your rights that you can exercise if you find the interest rate not so compelling. 

There are both advantages and disadvantages of a fixed rate of interest and boils down to an individual level. 

What are some of the advantages of a fixed rate of interest? 

There are numerous benefits of having a fixed rate of interest for a home loan. 

1. Sense of certainty:

A fixed rate of interest for a home loan gives you a sense of certainty. You are well aware of how much you are going to repay for the rest of your tenure. This gives you a lot of confidence as you know how much to save for the next instalment. 

2. Better planning:

Since you know that the interest rate is fixed and you have to pay a certain amount, you will easily be able to make smart financial choices. You can plan your budget accordingly, and save your money efficiently. 

3. Resistant to a sudden increase in market rate:

This is another advantage of preferring a fixed rate of interest for a home loan. You are completely immune to a sudden upsurge in the market rate. In the case of tomorrow, the market rate suddenly goes up, your interest rate remains constant. So, you now don’t have to pay any extra amount in the form of EMI. 

When should you prefer a fixed rate of interest for a home loan? 

Here are some of the instances to consider fixed-rate loans:

1. If you are comfortable with the EMI:

If you are comfortable with the current instalment you are paying, then you should stick to a fixed rate of interest. If this amount doesn’t bother you and you feel satisfied with how much you are paying, then there is no reason to choose anything over a fixed rate. 

2. If the unpredictability of the market bothers you:

In case you feel that the market rate is not constant and might increase shortly, then to prevent this you should stick to a fixed rate. Suppose, you are paying 15% interest which is fixed throughout the tenure and suddenly you sense that the market rate is going to be 20%, then it is worth staying where you are right now. 

3. If you see that the interest rate has been constant all the time:

If you see that the interest rate is not changing much and has been constant for a long time, then you should consider a fixed rate of interest for a home loan. 

Now that you have read about the fixed rate of interest, let’s see the other side of the story. 

What is a floating rate of interest when it comes to a home loan? 

Unlike a fixed rate of interest, the floating rate of interest is variable and changes according to the market rate. It is therefore also called the “variable rate” of interest or “adjustable rate” of interest. So, if the market rate increases in the future, then the interest rate is also going to increase and vice versa. 

The reset period for the floating interest rate depends on the option that the bank provides you and the date you apply for it. It could be quarterly, half-yearly or even yearly, depending on what date you apply for. Suppose, the interest rate changes every quarter, then if you apply in January, the interest rate changes in May. 

What are some of the benefits of applying for a floating interest rate? 

1. Unexpected gains:

You can have unexpected gains because of market fluctuations and this will be profitable for you. You have a better scope of gaining if the market rate constantly goes down and decreases than the base rate. 

2. Lower rate of interest:

If you ask from the point of observation, floating rates are lower than fixed rates in most cases. The difference is about 1% to 2.5% approximately. This isn’t always a sure thing, but most of the time, the floating interest rate is slightly lower than the fixed interest rate. 

3. If the market rate is constantly decreasing:

You might see a trend in the decrease of the market rate which is why you might prefer considering a fixed interest rate. 

When should you consider taking a floating interest rate? 

1. If you predict the market rate to be decreasing:

If you predict that the market rate is going to decrease in the future, you should go for a floating interest rate. 

2. If your fixed rate is on the higher side:

If your fixed interest rate is high, you should consider changing to a floating rate.

Summing it up

Whether you should go for a fixed rate or a floating rate, depends on the market rate. If you predict the market rate to decrease in the future, you should go for a floating rate. If you are comfortable paying at the present interest rate, then stick to a fixed rate. 

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