While applying for a home loan, buyers have an option of going for a loan with a fixed interest rate, or a floating interest rate. This article explores the differences between the two, and offers an approach on making the best decision applicable to your specific situation.
Differences Between Floating Interest Rates and Fixed Interest Rates
Detailed information about floating interest rates and fixed interest rates can be found here. However, the key differences are summarized below:
In the present scenario, very few lenders offer fixed interest rates (one example being Axis Bank).
Is Floating Interest Rate or Fixed Interest Rate Better for You?
To make an informed decision about the preferred loan interest rate option for you, there are a few questions that you should consider asking yourself besides just looking for what would be more affordable, such as:
How Old Are You?
Age plays an important role in determining what might be a better option for you. If you fall in the age bracket of 21-40 years, and there is an increase in the floating interest rate of your loan, you would generally have the option to extend your loan period rather than having to increase your EMI. Whereas, if you are older than 40, you would be subjected to a higher EMI instead. Therefore, a floating interest rate can be considered a more attractive option for younger buyers.
Do You Value Stability Over Risk?
Floating rates, inherently, are riskier compared to fixed interest rates, as a cheaper interest rate today can translate to a more expensive rate in the future. For buyers who prefer to plan out their budgets for the future, a fixed interest rate would make more sense, as there would be limited scope for uncertainty.
These questions should not be considered without taking into account current market conditions, however, with fixed interest rates only offered at a few lending institutions. If your preferred financial institution of choice (such as SBI) does not offer a fixed interest rate on home loans, you would have to opt for a loan with a floating interest rate. It is also always advisable to read the fine print in your agreement before you sign it.
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