Buying a house is a long-term commitment and one of the most significant purchases that an individual makes in his lifetime. Therefore it involves a deep decision making from deciding about the options to finance a house to choosing the best lender for a home loan to examining the home loan eligibility based on sources of revenue. One of the crucial decisions before applying for a home loan involves deciding about the best loan provider for a home loan. Various banks and non-banking financial institutions provide home loans to the borrowers and have a different set of eligibility criteria. To decide about the best bank for a home loan, you must compare the interest rates of various lenders, other charges like processing fees, prepayment charges, legal and miscellaneous charges etc. Another significant factor that helps you to choose about your home lender is deciding the type of Interest rate on your home loan.
What are the different types of interest rates on a home loan?
Banks and Non-Banking Financial Institutions provide options to choose between a fixed rate of interest and a floating rate of interest to the home loan borrowers.
What is a fixed rate of interest on a home loan?
If home loan borrowers choose a fixed rate of interest on a home loan, then they have to pay equal instalments on their loans during the entire tenure of the loan. The home loan interest rate remains constant irrespective of change in Interest rates on a home loan and are usually higher than the floating rate of interest. Borrowers must choose a fixed rate of interest on the home loan if they are sure that the home loan rates would not fall below a certain level.
What is a floating rate of interest on a home loan?
A floating rate of interest on home loan changes with a change in market conditions. As, the base rate of lending institutions changes, thus the rate of interest on a home loan changes automatically. Thus, if the home loan borrowers choose a floating rate of interest on a home loan, then the rate of interest changes with the change in the base rate. The floating rate of interest is 1–2% lower than a fixed rate of interest.
Comparison: Fixed v/s Floating Rate of Interest
| Point of difference | Fixed Interest Rate | Floating Interest Rate |
| Interest Rate | The Fixed Interest Rates are higher than floating rate of interest | Floating Interest Rates are lower than fixed Interest Rates. |
| Volatility | Fixed Interest Rates on a home loan are not affected by financial market conditions | Floating Interest Rates are affected by changes in the financial market |
| EMIs | With fixed interest rates borrowers have to pay fixed EMIs | With floating Interest Rates EMIs change as per interest rate or MCLR |
| Budget | As the rate of interest on a home loan is fixed it is possible to do budget planning. | It is difficult to budget or manage financials with a floating rate of interest. |
| Security | Fixed Interest Rates provides a sense of security to home loan borrowers. | Fixed Interest Rates help to generate savings |
| Suitability | Fixed Interest Rates are suitable for short/medium term. | Floating Interest Rates are suitable for long term. |
| Risk | With fixed rate of interest borrowers have to bear lesser risk | There is greater risk factor on floating interest rates
|
Conclusion: Thus, a home loan borrower can choose the rate of interest depending on the risk-taking factor. They can also switch from a fixed rate of interest to a floating rate of interest by paying a conversion fee of 2% of the loan amount as charged by the lender.
Summary: Home Loans: Floating vs Fixed Interest Rates
Banks and Non-Banking Financial Institutions provide options to choose between a fixed rate of interest and a floating rate of interest to the home loan borrowers.hus, a home loan borrower can choose the rate of interest depending on the risk-taking factor. They can also switch from a fixed rate of interest to a floating rate of interest by paying a conversion fee of 2% of the loan amount as charged by the lender.
Comparison: Fixed v/s Floating Rate of Interest
| Point of difference | Fixed Interest Rate | Floating Interest Rate |
| Interest Rate | The Fixed Interest Rates are higher than floating rate of interest | Floating Interest Rates are lower than fixed Interest Rates. |
| Volatility | Fixed Interest Rates on a home loan are not affected by financial market conditions | Floating Interest Rates are affected by changes in the financial market |
| EMIs | With fixed interest rates borrowers have to pay fixed EMIs | With floating Interest Rates EMIs change as per interest rate or MCLR |
| Budget | As the rate of interest on a home loan is fixed it is possible to do budget planning. | It is difficult to budget or manage financials with a floating rate of interest. |
| Security | Fixed Interest Rates provides a sense of security to home loan borrowers. | Fixed Interest Rates help to generate savings |
| Suitability | Fixed Interest Rates are suitable for short/medium term. | Floating Interest Rates are suitable for long term. |
| Risk | With fixed rate of interest borrowers have to bear lesser risk | There is greater risk factor on floating interest rates
|
