Fixed or Floating Interest Rates, which is Better for Home Loans?May 25, 2024

Fixed or Floating Interest Rates

For those who are planning to buy a flat in Trivandrum, its normal to avail of a home loan to cover the initial purchase of their dream home. And when it comes to choosing a home loan, an important factor to consider is the interest rate – whether its fixed or floating. This comes with its own advantages and disadvantages, and here’s a look at some of them:

Fixed Interest Rates

The main characteristic of fixed interest rates is that it remains the same throughout the loan tenure. Knowing your exact monthly payment helps you plan your budget better, both in the long and short term. It also reduces the instability of rising interest rates in the future. Its advantageous to opt for this when the interest rates are on the lower side and you can lock in the lower rate throughout the tenure. The downside to this is that when the market rates decline, those with fixed interest rates do not get to benefit. Another disadvantage is that the initial downpayments are on the higher side with fixed interest rate loans.

Floating Interest Rates

Also known as variable rates, floating interest rates are linked to market conditions and typically have lower initial monthly interest payments as compared to fixed interest rate loans. This results in early cost savings, with borrowers benefiting from lower monthly payments. Though this can be considered an advantage, there is always the risk of rising monthly payouts in case the market rates rise, leading to a strain on the borrower’s finances. This unpredictability can challenge the borrower’s monthly budgets if they are unprepared for rate hikes, especially if the interest rates climb substantially.

Finally, the choice between fixed and floating rates depends on several factors. It hinges on market outlook over the loan’s tenure, the borrower’s financial stability, as well as their ability to withstand risky market fluctuations. Fixed interest rate loans are ideal for those averse to taking risks, and prioritizing financial stability over unpredictability – especially if the interest rates are expected to rise. Floating rates, on the other hand, are ideal for those who are comfortable in taking risks in market conditions that are expected to remain stable or decline further.

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