Buying a home on loan affects your life for years to come. This makes it even more important to take prudent decisions before you apply for a loan- whether it is about finding the perfect home, the best location, the most reliable financial institution, the most lucrative loan terms, or the type of rate of interest applied to your home loan repayment amount.
Generally, financial institutions charge a fixed rate or a floating rate of interest on housing loans. Both have advantages and disadvantages. Considering your preference, eligibility, and availability, you can decide which type you want to go with. This decision will affect your finances and should be carefully considered.
Before you make up your mind, you must understand the difference between both types of interest charged on your housing loans.
What Are Fixed Rates Of Interest On Home Loans?
Fixed interest rates on housing loans mean that the rate offered by the financial institution remains the same throughout the Home Loan tenure. No risk or any volatility can affect the interest rate, which is the reason why these are slightly higher than the floating interest charges.
It is suitable for you if you feel there could be an increase in interest rates in the future. If you go for a Home Loan prepayment, this category can be subjected to a penalty or a charge.
What Are Floating Rates Of Interest On Home Loans?
Floating interest rates depend on market conditions, external factors, and volatility in the market. These rates can fluctuate with changing scenarios, and there could be times when the rates become low and sometimes extremely high. Floating rates of interest come with a high risk of volatility.
These rates are lower than the fixed ones and don’t attract any charge for prepayment of Home Loans. The Home Loan interest rate changes with a change in the financial institution’s benchmark rate. If you have good market know-how and are hopeful that the charges may lower shortly, you should opt for floating interest rates for home loans.
Difference Between Fixed Rate of Interest and Floating Rate of Interest on Home Loans
If you are a risk-aversive person, stick to the fixed rate of interest for a Home Loan, which will see no changes. If you are looking for flexibility, you can opt for floating-rate loans. You can also convert your fixed rates into the floating interest rate.
Before you decide which one you want to settle for, you must have a thorough understanding of the market, personal choice, recommendations of the financial institutions, and future movements in interest rates.
Why Do Financial Institutions Offer Fixed Interest Rates on Mortgages?
Several financial institutions offer a fixed interest rate on housing loans to protect customers’ concerns. Since the RBI has lowered the main interest rate, it has made variable lending rates cheaper and more economical, which are at record lows.
This is also one of the key reasons why NBFCs offer fixed rates to attract more customers at higher home loan interest rates to optimize profits.
Considering this fact, you can consider the floating interest rate on home loans as they offer flexibility to customers.
Choosing a fixed, variable, or compound loan interest rate depends on your requirements and circumstances.
If you feel the interest rates will rise in the future, you must stick to the fixed rate of home loan interest. If you want to take advantage of fluctuating interest rates, which can also be low and profitable, you can take the floating interest rate.
You are free to switch from a fixed interest rate to a floating rate after talking to your financial institution at any time. Consider these differences and analyze which will be better for you.