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.
- 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
- 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.
|Amount||Tenure (Years)||Interest rate||EMI||Total|
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
- 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.
- 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.
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.
– November 19, 2013