With most types of home loans, you can either opt for a fixed interest rate or a floating rate. Getting a home loan isn’t a tough task anymore, but choosing between fixed or floating interest rate is definitely a difficult one. Some people split the amount they borrow in between two loans, one with a fixed interest rate, while the other one with a floating rate.
A home loan that has a fixed interest rate is definitely a safe option that offers a sense of certainty, but it may also result in borrowers locking onto an interest rate that is much higher than what it will be in the future. So how do you take a decision of which one to select?
Fixed interest rate
A fixed interest rate doesn’t change during the course of time of the fixed rate that you opt for. Towards the end of your fixed interest rate term, you can either choose a new one from the rate available at that point of time, or move to a floating interest rate. The main disadvantage of a fixed interest rate is that they are usually 1 to 2.5 percentage points higher in comparison to the floating rate home loan. Another drawback is that if the interest rate decreases, you will not benefit out of the reduced rates and will have to continue paying the same amount as earlier.
Pros and cons
There’s no chance for you to be affected by the changing interest rates, so you have to be certain about how much your each repayment would be, during the course of time.
If the floating rate reduces in comparison to the fixed interest rate, you continue paying the fixed rate.
On some occasions, fixed rates can be lower than the floating rates.
If you want to repay the loan faster than what was discussed earlier at the start of a fixed interest rate term, you might have to pay an early repayment charge for it.
Floating interest rate
Like the name suggests, floating interest rate varies basis what the market scenario is. With the change in the benchmark rate, there’s also a proportionate change in the interest rate. A rise in market rates will automatically increase the cost of loan for the borrower and invariably increase the interest income for the lender. Conversely, a drop in the interest rate will decrease the cost for the borrower and decrease the interest income for the lender.
Pros and Cons
For floating interest rates, you have the advantage of making lump sum repayments of any size at any point of time without any penalty.
If the interest rates drop, you have the potential to pay off your loan faster by keeping your repayments at the same level.
If the interest rates increase, so will your repayments which could restrict your budget to some extent.
As both the interest rates have their respective positive and negative aspects, choosing the type of interest rate is a personal choice. What may suit one may not necessarily be the best choice for the other. Before you finalize on any one, you must consider home loans with fixed and floating interest rates from different banks or financial institutions. Your financial preference and situation are the determining factors of the rate that you opt for!