If you are considering a home loan to purchase a house, the interest rates must be your primary concern. Not only do they determine the affordability of the loan but the overall repayment amount.
But have you decided which interest rate is suitable for your loan? Lenders generally offer two different kinds of interest rates for housing loans – Fixed rate and variable rate. You must choose between the two based on your financial needs. Read this article to learn more about the two types of home loan interest rates and make an informed decision.
What are fixed interest rates?
As the name suggests, fixed interest rates remain constant throughout the loan tenure. This means that economic fluctuations do not impact this type of interest rate. Thus, you can easily use a home loan EMI calculator to get a clear picture of your monthly EMIs and plan your budget accordingly.
What are variable interest rates?
Variable or floating interest rates are subject to change as per market fluctuations and prevailing economic conditions. And with a change in the interest rate, you will also experience a difference in your monthly EMIs.
The variable interest rates are made up of a base rate and a floating element. If the base rate changes, the floating element will automatically change. Lending institutions often revise their variable home loan interest rates for housing loans as per the base rates announced by the RBI and the government every quarter.
Fixed vs variable rate on home finance
Now, let us compare the two interest types to have a closer look.
Fixed interest rates are usually higher than variable interest rates. If you are wondering how big the gap is, it can range from 1 to 2.5%. Hence, a significant benefit of opting for variable rates is that the EMI amount is lower. But that should not be your only criteria for choosing the interest type.
If you are considering a loan with an extended tenure, then a changing interest rate might not be the best idea. This is because if the rate of interest suddenly rises, your EMIs and interest payments will increase.
However, if you expect a drop in the interest rates over time, opting for a floating or variable rate loan will reduce the interest rate applicable to your loan. This will also lower the total repayment cost.
But with a floating rate loan, it is not possible to have a fixed repayment plan, and you may end up paying more than you planned for. So, if you are looking for stability during repayment, you can choose a fixed interest rate.
Parting thoughts
So, fixed or variable loan rate, which is better? While there is no definitive answer, you must pick the one that works best for your financial needs.
Compare multiple loan offers from lenders and choose the most attractive interest rates. Also, plan your repayment schedule by using EMI calculators for home loans. Calculate your loan term, monthly instalments, and interest payable before approaching the lender.