Once you have finalised your dream home, the next step — well for most of us — is to look for a home loan. But which interest plan should one opt for: Fixed or floating? This choice can significantly impact your monthly EMI, and also the total interest that you end up paying. Let us explore the key factors to consider when making this important decision.
Understanding fixed and floating rates
Fixed interest rates: The interest rate remains constant throughout the loan tenure, which means that borrowers can plan their finances without worrying about fluctuations in interest rates. This can be particularly advantageous in a rising interest rate environment, as borrowers are protected from increases that could elevate their monthly payments.
Floating interest rates: They are tied to market conditions and can fluctuate over time. This means that if the benchmark interest rates decrease, borrowers benefit from lower monthly payments. Conversely, if rates increase, their payments will rise as well. Floating rates are generally lower than fixed rates at the outset, making them an attractive option for those willing to accept some level of risk for potential savings.
“Fixed and floating rate home loans each come with their own advantages and disadvantages, and the choice should be made based on your income stability and long-term repayment plans. If your income is stable and you can handle potential fluctuations in EMI payments, a floating rate might be suitable. However, if you prefer financial certainty and want to avoid the risk of rate hikes, a fixed rate would be more appropriate,” said Adhil Shetty, CEO of Bankbazaar.com.
Factors to consider before choosing loan type
Market outlook: Current economic conditions and future interest rate projections play a crucial role. If rates are expected to rise, a fixed rate might be more advantageous.
Risk tolerance: Borrowers must assess their comfort level with potential payment fluctuations. Those with stable incomes may be better positioned to handle the uncertainty of floating rates.
Loan term: For shorter-term loans, floating rates may be more appealing due to potentially lower overall costs. Longer-term borrowers might prefer the security of fixed rates.
Financial goals: Consider how the loan fits into your broader financial picture. Depending on your situation, choose between fix or floating.
First Published: Aug 07 2024 | 5:47 PM IST
