Key difference: Fixed interest rates vs floating interest rates

 

Getting a home loan is not a big task these days. To get the loan, one can proceed to a bank to get his loan financed and sanctioned, however the biggest dilemma of the person taking the loan is whether to get the loan at fixed interest rate or floating interest rates.

This is one of the complex issues which is to be asked before sanctioning a loan. A home loan is one of the major financing decision that one can take as the amount of the loan is quite big along with the long transaction period (as mostly the loan will continue to be paid over several years).

There are the key differences and advantages and disadvantages of fixed and floating interest rates.

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Fixed Interest Rates vs. Floating Interest Rates

 

Fixed Interest Rates refer to one interest rate throughout the tenure of the loan. A person who has taken the loan has to pay equal monthly installments in all the upcoming payments of the loan which includes both interest and principal. On the contrary, in Floating interest rates, there is a rate given by the banks on the loan known as the base rate plus there is a floating element attached to it.

The floating charge is anywhere between the range of 1-2% of the said percentage.   Generally the fixed interest is always higher than the floating interest rates and if for any reason, the interest rate decreases, the home owner who has taken the the fixed interest loan does not get the benefit of low interest rate and he has to pay the same amount every time. There are also some loan agreements where the fixed rate is not even truly fixed in nature and after a fixed tenure is over the loans are charged on a floating rate basis.

There are also some loan agreements where the fixed rate is not even truly fixed in nature and after a fixed tenure is over the loans are charged on a floating rate basis.

It is not advisable to go for fixed interest rate regime if the economy is in favor of lower interest rates as the investor will not get the benefit of the lower interest rate which is charged by the banks from investors. If the economy is showing signs of improvement and the rates are expected to go down then the investor should go for floating interest rate.

If the income of the investor is fixed in nature and the investor is risk-averse in nature and is ready to forgo the benefits of lower interest rates in the future then he should opt for a fixed interest rate on his loan.

On the other hand, if the investor has variable income in nature and expects the interest rates to ease down or is a risk taker and at the same time can borne the possibility of higher payment of interest, he should be looking towards floating interest rates.

If the person thinks that he has the ability and the financial strength to prepay the loan earlier than the specified tenure then he should opt for floating interest rates, on the contrary if someone has many commitments and priorities to meet and realizes that he cannot prepay the loan amount he should opt for fixed interest rates.

Opting for interest rates in the loan agreement depends a lot on the investor’s objectives and before taking any loan from any bank, the investor should compare the interest rates from various financial institutions. If certainty and security are prime considerations, a fixed rate home loan will be the best and however it won’t come without premium on interest rates.

At the end, there is no right or wrong option before opting for a fixed or floating interest rate. It is all about the investor’s preference and the risk appetite of the investor and the objectives. If you think that the market outlook doesn’t look so good over the next 3 years and your fixed rate option is significantly higher than the floating rate one, it is recommended to got for a floating rate home loan.

If you think that rates are likely to go up significantly past the fixed rate mark (say because of improving situations in the country / stable government etc). Then you should take up a fixed rate home loan.

 

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