Are Loans with a Floating Interest Rate or Fixed Interest Rate Better for You?

Explainer Jun 14, 2022

While applying for a home loan, buyers have an option of going for a loan with a fixed interest rate, or a floating interest rate. This article explores the differences between the two, and offers an approach on making the best decision applicable to your specific situation.

Differences Between Floating Interest Rates and Fixed Interest Rates

Detailed information about floating interest rates and fixed interest rates can be found here. However, the key differences are summarized below:

Fixed Interest Rates

Floating Interest Rates

Interest rates are generally higher

Interest rates are generally lower

Rates do not vary throughout the loan period

Rates fluctuate with respect to repo rate changes by the RBI

Buyers are generally subject to extra fees - such as penalties for early repayment, and larger processing fees [1][2]

Buyers are not always subject to early repayment fees (varies with the bank)

In many cases, fixed interest rates are subject to conversion into a floating rate after a given amount of time. (For example, HDFC’s fixed rate loan product changes the loan to one with a floating rate after 2 years)

In the present scenario, very few lenders offer fixed interest rates (one example being Axis Bank).

Is Floating Interest Rate or Fixed Interest Rate Better for You?

To make an informed decision about the preferred loan interest rate option for you, there are a few questions that you should consider asking yourself besides just looking for what would be more affordable, such as:

How Old Are You?

Age plays an important role in determining what might be a better option for you. If you fall in the age bracket of 21-40 years, and there is an increase in the floating interest rate of your loan, you would generally have the option to extend your loan period rather than having to increase your EMI. Whereas, if you are older than 40, you would be subjected to a higher EMI instead. Therefore, a floating interest rate can be considered a more attractive option for younger buyers.

Do You Value Stability Over Risk?

Floating rates, inherently, are riskier compared to fixed interest rates, as a cheaper interest rate today can translate to a more expensive rate in the future. For buyers who prefer to plan out their budgets for the future, a fixed interest rate would make more sense, as there would be limited scope for uncertainty.

These questions should not be considered without taking into account current market conditions, however, with fixed interest rates only offered at a few lending institutions. If your preferred financial institution of choice (such as SBI) does not offer a fixed interest rate on home loans, you would have to opt for a loan with a floating interest rate. It is also always advisable to read the fine print in your agreement before you sign it.

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