Fixed or Floating Interest Rate: Which is Better for Home Loan

Whether you are looking to buy a new home or construct your dream palace, a home loan can help you with the large sum of money required. But, just like any other loan, there are a lot of factors and decisions involved in applying for a home loan. One of the key factors is the type of interest rate you should opt for. When choosing home loans, most banks offer fixed and floating interest rates for your loan. Both of them have key features and benefits that can help you make a smart financial decision. 

In this article, we'll dive deeper into what fixed and floating interest rates are, along with their key differences, to help you choose the one that fits your needs perfectly. 

What is a Fixed Interest Rate?

A fixed home loan interest rate means the amount of interest that you have to pay every month is fixed for the whole duration of your loan. This rate is fixed at the time of applying for the loan and continues to be the same throughout. 

Key Features of Fixed Interest Rate

• Stable EMI: With fixed interest rates, the monthly EMIs are fixed, helping you plan your financial year with ease. You can use the MyMudra EMI calculator to gain a thorough understanding of monthly expenditures. 
• Protection from Market fluctuations: One of the key benefits or features of a fixed interest rate is the protection from ever-fluctuating market forces. No matter the demand and supply, the rate of interest for your loan remains the same. 
• Long Tenure: Fixed interest rates are usually offered for long-term loans for 20-30 years. 

What is a Floating Interest Rate?

A floating home loan interest rate, unlike a fixed rate, fluctuates based on the market conditions and the lender’s benchmark rate, such as the repo rate of that time. This means that your EMI can go up or down every other month.  

Key Features of Floating Interest Rate

• Lower Initial Rate: Floating interest rates are usually lower at the time of the loan application. 

• Market-Linked Rates: Based on RBI policies, inflation rates, and other economic conditions, your interest rate will keep changing.

• Variable EMIs: Your monthly payments can go up and down, helping you save money at times. 

Pros and Cons of Fixed vs Floating Interest Rates

The following are the key differences between fixed and floating interest rates:

Market Trends and RBI Policies Impact on Home Loan Rates

The following are the key factors that influence the rate of interest on home loans. Understanding these factors will help you make a wiser financial decision as per your needs: 

RBI’s Monetary Policies

RBI uses several monetary policies to influence the interest rates for loans directly:

• Repo Rate: It is the interest rate at which the RBI lends funds to many commercial banks. When the repo rate increases, the home loan interest also takes a hike, leading to higher EMIs for a floating interest rate. However, when it falls, you have to pay a lower sum of money for your monthly payment. A fixed rate is better for avoiding these fluctuations. 
• Cash Reserve Ratio (CRR): It is the percentage of a bank’s total deposits that must be maintained as reserves with the RBI. If they have more cash reserved, they encourage banks to take loans with lucrative policies and better rates. However, when the cash is low, stringent policies will discourage the loan service from the RBI reserve. This directly influences the home loan or any other loan interest. 

Inflation Rates

Higher inflation rates lead to tighter RBI policies, making borrowing costs higher and increasing home interest rates. Understanding the market forces can help you choose between fixed and floating interest rates. A floating rate is better for capitalising on the lower inflation days.

Loan Tenure

Your interest rates are determined based on the repayment period of your loan. This implies that by choosing a longer-term loan, like 20-30 years, you are more likely to secure lower interest rates compared to a brief 5-year loan. However, it is worth considering that the rate depends on the lender's policy and risk assessment.

Also read: Home Loan for Pensioners

Credit Score

People with excellent credit scores have various loan options available to them. From better interest rates to flexible loan tenures, a better credit score helps you choose a financial option that fits your needs. A credit score of 700 or above is usually an excellent score. Whether fixed or floating home loan interest rate, your credit score can affect your home loan interest rate.

Income Stability 

If you have a stable and high-paying job or are a government official, interest rates are usually on the lower side due to reduced risk for the lender. For self-employed and irregular income applicants, rates can be a bit higher, along with some stringent terms and conditions. 

Conclusion

Selecting a fixed home loan interest rate or a floating home loan interest rate is among the key decisions in choosing a home loan. In addition to this important aspect, you should also take into account customer support, loan duration, and the application procedure to guarantee a smooth home loan experience. MyMudra is your trusted partner when it comes to easy access to loan facilities, be it personal, home or a business loan. Our attractive interest rates and smooth application process will help you finance your dream home in just a few clicks. So, what are you waiting for? Apply for a home loan with MyMudra and build your dream home today!