DIFFERENCE BETWEEN FIXED & FLOATING INTEREST RATE FOR LOAN

One of the most common types of loans, a home loan is availed to purchase a home. Available at a much lower interest rate as compared to any other type of loan, a home loan is offered by several renowned NBFCs, private and public banks. The amount of loan and the interest applicable on it is determined by a number of factors such as the eligibility of the applicant, market price, interest rates prevailing in the market, etc.

Now, the interest rate is one of the most crucial factors to take into consideration when taking a home loan. An individual taking a home loan has the option to choose between fixed and floating interest rates on their home loan.

Let’s understand the concept of fixed and floating interest rates on home loans.

Fixed Interest Rate

In a fixed interest rate, the interest rate is fixed throughout the loan tenure. An individual choosing a fixed rate of interest on his/her home loan will pay fixed EMIs, regardless of fluctuations in the prevailing market rates of interest. This type of interest rate is usually ideal for individuals who prefer to plan their finances well in advance as monthly instalments in the fixed interest rate on home loans remain the same for the entire tenure of the loan. However, the fixed rate of interest is usually 1% - 2% higher than the floating rate of interest.

Floating Interest Rate

In contrast to fixed interest rates, the floating rate of interest on the home loan fluctuates as per the prevailing market scenarios. This fluctuation may have a direct impact on the loan tenure or the monthly instalments. Based on the Repo Rate, the floating interest rate on the home loan may fluctuate several times throughout the tenure of the loan and as a result, the monthly instalments as well. However, these fluctuations may or may not be frequent and will be temporary. This type of interest rate can make it rather difficult for an individual to plan finances in the long term.

Now that we know what floating rate and fixed rate are, let’s understand the difference between the two:

• The primary difference between floating rate and fixed rate is that the latter is higher than the former. Although the difference in the interest rate is merely by 1% - 2%, an individual must be aware of it while making a decision.

• The interest rates may increase or decrease as per the prevailing market conditions. And thus, floating interest on one's home loan will also get impacted. The number of monthly instalments may increase or decrease. However, when opting for fixed rates on home loans, the applicant must know that if the interest rates decrease in the future, they will not be able to enjoy the lower interest rates.

• With fixed interest on a home loan, an individual can plan finances better as the monthly instalment amount remains constant throughout the tenure of the loan. However, floating interest on a home loan, one can expect an increase or decrease in the EMI amount frequently. Even though the fluctuations are not significant, the inconsistency in EMI amounts may make it difficult to plan finance in the long term.

• There’s usually a pre-payment penalty on fixed interest rates while if an individual chooses a floating rate of interest, they may pre-close their home loan, partially or full without any pre-payment penalty. The pre-payment penalty may vary from lender to lender and also, based on certain different factors such as loan amount, tenure, etc.

Which is better?

While for some people fixed rate of interest is preferable, some may benefit from a floating rate of interest. It is entirely upon the individual choice of the home loan applicant and their preferences. The suitability of both may vary from individual to individual. 

A home loan can be a long-term commitment and thus, people applying for a home loan must be very well aware of all the norms associated with it. Researching the market, different types of loans, and the prevailing rate of interest, and trusted lenders are a few of the factors that a home loan applicant must consider before proceeding.

At Muthoot Homefin, we offer a range of home loans to cater to different housing needs, be it for purchase, refinancing, improvement of existing properties or home loans for NRIs. Visit your nearest Muthoot Finance branch to know more.