Skip to content


Fixed or Floating interest rate home loan, which one is better?

Posted in Finance, Home Loan.

Every potential home-buyer opting for a home loan is often faced with the classic dilemma whether to choose a fixed interest rate or a floating one. However, there is no straight answer to this confusion. Decision needs to be taken after monitoring the pros and cons of both alternatives. Let’s study them individually.

Fixed Interest rates

Under fixed rates, an individual is required to repay the principal loan amount and interest in equal installments over the tenure of the loan. Here, the interest rate is fixed throughout the loan period. For example, if a borrower has taken a home loan of ₹. 20,00,000 at an interest rate of 11% for a duration of 10 years. The EMI amount will remain constant at ₹. 27,550.

Pros:

  • The Rate of Interest is fixed for the loan tenure
  • Good for individuals who want to make fixed monthly payments to avoid negative impact on their monthly budgets
  • The borrower has total clarity about the EMIs and interest to be paid during the loan period

Cons:

  • The fixed interest rates generally come 1 to 2% higher when compared to the floating rates
  • If the interest rates are reduced by the bank during the loan tenure, one might not be able to enjoy the benefits as the interest rates are fixed already.


Floating Interest Rates

Under floating home loan rates, an individual is required to pay the monthly installments based on the interest rates derived from a base rate plus the floating element. The interest rates on the home loan would change every now and then depending on several market factors. This would eventually change the EMI amount. Higher the interest rates, higher the EMI and vice-versa.

For example, if a borrower has taken a loan of ₹ 20, 00,000=00 at floating interest rate of 9.5% for duration of 20 years. The EMI amount will be ₹ 25880.00 so it means every month you are saving up to ₹ 1670=00 which if we calculate in the long run will make a big difference. In total you are saving up to ₹ 2,00,400=00 In this case you will benefit by choosing floating interest rate option if the floating rate remain same for next 10 years.

AmountTenure (Years)Interest rateEMITotal
₹20,00,0001011%27,550₹ 33,06,000
₹20,00,000109.5%25,88031,05,600

Till the time interest rate doesn’t goes beyond 11% floating rate is a better option. You need to carefully analyse the difference between fixed & floating interest rates. If interest rate difference is less than 1%, then one can think of going with fixed rate option. You can check your EMI by using this EMI Calculator tool

Pros:

  • These come at relatively cheaper rate compared to the fixed ones. This means, the borrower would pay less interest rates if loan is taken.
  • The current scenario of the economy would cause the interest rates to fluctuate. This means, the loan-owner always has to pay interest rates that reflect the economy’s progress.
  • In the long run, there are chances of interest rates of falling, therefore letting the borrower to enjoy low home loan interest rates.

Cons:

  • Unequal EMIs to be paid each month
  • One is not able to maintain a fixed budget due to the fluctuations
  • Right now, the interest rates are at its peak. It may take some time for RBI to take necessary steps towards reducing them.

The fixed and floating interest rates both have their own set of positives and drawbacks. The fluctuations in the economy cause them to behave differently. However, considering the current scenario, there are little chances of interest rates going up. This makes the floating rates to be a better option.


Summary

Solving this dilemma between fixed and floating interest rates can be a tedious job. Fixed rates can prove helpful if you are clear about your monthly budgets. However, the current scenario of the economy proclaims the floating rates to be a better choice. Make a wise decision regarding this.


12 Responses

Stay in touch with the conversation, subscribe to the RSS feed for comments on this post.

  1. srinivas says

    Hi Pankaj,
    Good Morning…!!!

    Can you please explain how to consider the Gratuity income under income tax, Example one employee worked 7 years in organisation and got 1,20,000 Gratuity amount based on his last drawn basic. In the amount how much amount get tax exempted and how much amount should taxable, can you please explain the calculation??

    Regards
    Srinvias B

    • Pankaj Batra says

      @Srinivas
      As Gratuity is received after five years of service, it would be non-taxable u/s 10(10) upto Rs 10 lakhs.

  2. vaibhav says

    Hi Pankaj, I have a home loan from axis bank @ 10.65 % floating, the current ongoing rate is around 10.25%, the retention manager says she can reduce my rate to 10.5% for a fee of Rs 7500 + ST. My question is that is it mandatory to pay this fees, or is there any guideline by RBI on the same as to how much the bank should charge.
    I was told by someone ( i don’t have proof) that ideally bank should not be taking any charges to reduce this rate, is that true ?? any comment would be of help thanks

    • Pankaj Batra says

      @Vaibhav
      I am not sure why bank is asking for such payment.
      You have a floating rate loan, so it should automatically be adjusted as per market rates.

  3. vaibhav says

    Hi Pankaj, thanks for your reply, I am actually revering to the markup rate. The current RBI rate is 10.25%, Axis bank has done a .4% markup for me while sanctioning the loan, hence the ROI is 10.65% for me, now to reduce this markup rate to .25 from .4, they are asking a processing fee of 7500 + ST. So what I want to confirm if the bank is right in asking for this or there is a flaw which they are trying to exploit

    • Pankaj Batra says

      @Vaibhav
      If you think this reduced rate would benefit more than the price you pay for it, you can go for it.
      Some banks follow this practice to gain from old home loans.

  4. A.P. says

    Dear Sir / Madam,

    I had a home loan of 20L. Starting from Oct-2014 for 30 Years with interest rate of 10.15%

    Being higher interest component compared to principle payment in each EMI. I wanted to withdraw my EPF against purchase of flat which is amounting 2.5L

    Now i want your valuable suggestion for doing so; considering following;

    (1) F.V. of 2.5L after 30 Years @ EPF Rate of 8.75% (with and without inflation @ 12%)
    (2) Effective F.V. Saving by loan prepayment with 2.5L considering 30 years loan EMI with Rate of 10.15% interest

    Request Expert to please advice.

    Regards,
    A.P.

  5. BHARATH KUMAR says

    Sir,
    I had purchased a residential building 2 years back that is in 2012. It comprises 4 portions. 1 portion is occupied by me. One portion let out. Another 2 portions were on lease (rent free) for Rs.20,00,000 (Rs.10,00,000 for each portion) already received by the seller from the tenants. I adjusted Rs.20,00,000/- from the sale value and I have duly shown the same in the Sale Deed and registered the Sale Deed for the full sale value including the lease amount of Rs.20,00,000/- I did not take any home loan at the time of acquiring the residential building.
    However In 2014 , when the lease period of the 2 portions came to an end I approached the bank for a home loan with a view of settling Rs.20,00,000/- to the tenants, I was denied home loan on the ground that home loan cannot be granted after purchase of the property.
    As such I had taken Property Loan(Loan against Property) for Rs.20,00,000 at 12.75% interest rate. My EMI for 7 years is Rs.36113/- per month. Annual principal repayment is Rs.1,90,152 and interest repayment is Rs,244,199/- At present the 2 portions are kept vacant and I do not want to let it out since I intend to sell the residential building after 1 year as I have to complete 3 years from the date of purchase to avoid short terms capital gain tax.
    I need following clarifications:
    1. I learn that income tax have to be paid on the expected market rent of the 2nd house even if the house is not let out. Can you kindly clarify as to why we have to pay income tax on the notional rental income when in the first instance we do not receive any rental income? Besides from what source of income we will be in a position to pay income tax on the assumed rental income not received by us?
    2. Are the other portions of residential houses in the same residential building considered as a 2nd house, 3rd house and fourth house for the purpose of Income Tax rules?
    3. Am I eligible for deduction of interest under section 24 from the annual rent received/receivable and can I deduct interest amount of Rs.1,90,152/- paid towards Loan against Property?
    BHARATH KUMAR

  6. BHARATH KUMAR says

    Okay. I agree some people may take rent in cash and show the house as vacant to avoid income tax as assumed by the government. But what about the genuine cases where the house remain vacant for non-availability of tenants.
    BHARATH KUMAR

  7. BHARATH KUMAR says

    I have proof of electricity bill which shows nil meter reading. Do I have to pay tax even in genuine cases of not receiving rent?
    BHARATH KUMAR

  8. RAVI says

    Dear Bharath Kumar
    1. It is only in case where the 2nd house is located away from the 1st house which is occupied by the owner, the tax liability arises on the annual rental value of the 2nd house even if it is self occupied by the owner and even if it is not let out. However, if the assessee has a house property which consists of two or more residential units in the same house building and all such units are self occupied, the annual value of the entire house property shall be taken as nil as there is only one house property, though it has more than one residential units. As such the vacant portions can be deemed to be self occupied by you.
    2. If the other residential units within the same residential building are let out and rental income is derived, the tax liability undoubtedly arises. But in your case since you have not received the rental income, there is no liability if shown as self occupied. In any case income tax authorities can levy income tax on the income derived. It is common knowledge a person cannot be assessed to income tax when he is not receiving any income from house property. If there is any such draconian law it can always be challenged in the court
    3.Although you have not taken loan at the time of acquisition but taken it after acquision for the purpose of clearing the lease/mortgage amount already received by the seller, in my opinion it should qualify for deduction under section 24 since you have taken Loan against Property in connection with your house property. However, it is better you may convince the Income Tax authorities and only if they agree you can avail the deduction facililty under section 24. I hope your case is genuine which can be considered since you have shown the lease amount of Rs.20,00,000 adjusted in the sale deed itself for purchase of property which is nothing but carried forward loan for the purpose of acquiring the property..
    S.RAVI



Have a Question? Click here to Ask now!





Some HTML is OK

or, reply to this post via trackback.