Different Types of Home Loan Interest
Rates and Their Merits and Demerits

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When it comes to home loan, lenders offer mainly two types of interest rates -– fixed interest rates and floating interest rates. While speedy loans benefit all loan applicants, these two different interest rates could leave the potential home loan applicant in two minds since there are pros and cons to both types of interest rates.

Given this, choosing the type of interest rate when applying for a home loan calls for some application of mind. One type of interest rate could suit certain applicants but may be unsuitable for others. 

To make the decision simpler, let’s explore what these two types of home loan interest rates are all about and their relative advantages and disadvantages. 

What is a Fixed Interest Rate Home Loan? 

With the fixed interest rate, the borrower pays a fixed EMI each month for the duration of the home loan tenure. The number of installments doesn’t change for the fixed period.

The tenor for home loans lasts from 15 to 30 years. The tenure depends on several factors, including age and the income to repay. 

Advantage: Immune to Market Fluctuation 

The fixed interest rate home loan can remain immune to market fluctuations. Wavering market conditions do not impact the interest rate, which stays fixed for the duration of the repayment tenure.

In other words, the fixed home loan interest rate is predictable and, therefore, is also secure and stable. 

Disadvantages

Fixed Interest Rate is Higher   

For every advantage, there should be a disadvantage that is not necessary. But nothing escapes disadvantages when applying for a home loan. The biggest disadvantage is that fixed rates tend to be 1 percent to 2.5 percent higher. 

Also, since the rates remain unchanged, the borrower will keep paying the same fixed interest rate even when interest rates fluctuate. Over the 20-30 year tenure, the interest rate amount could build up to a sizeable sum.

Even Fixed Interest Rates can Change  

However, the ‘fixed’ in the fixed interest rate home loan is misleading. Economic conditions are prone to change, and lenders often add a cautionary clause: Rates would be raised if market conditions deteriorate.

In other words, a paradox exists, i.e., even the fixed interest rate home loan is subject to market fluctuations.

That said, different lenders operate on different home loan interest rates. The home loan applicant should determine whether the fixed rate is for one year, two years, or the entire loan tenure. The bottom line is that fixed-rate tenure is the safest. 

What is a Floating Interest Rates Home Loan?

Floating interest rates, by definition, fluctuate with changes in market conditions. But the floating rate is linked to a base rate, and if the base rate fluctuates, so will the floating rate — maybe, only for the short term.

Of late, floating rate home loans had become popular because interest rates had dropped by 1% to 2.5% compared to fixed rate home loans. 

Advantage

Lower Interest Rate

A key advantage of this kind of home loan is that the borrowers can benefit from the lower home loan interest rates that floating interest rate home loans usually have.

The floating home loan interest rate is usually 1% to 2.5% lower than fixed interest rate home loans.   

Disadvantage

EMI Unpredictability  

However, what if market fluctuations push the floating rate higher than the fixed rate interest on the home loan? This would not be a problem in the short term but could become one for people with limited incomes and fixed budgets.

When applying for a home loan, one should be aware that the unpredictability of the floating rate could be difficult to handle over time. Rising EMIs could disturb and play havoc with the household budget. 

In Conclusion

The floating rate tends to fall compared to the fixed rate, but there are chances for the floating rate to rise, forcing the home loan borrower to pay a higher interest rate and a bigger EMI. Then, borrowers can make a switchover, but it should be availed only if there is still a long way to go for the tenure to end.

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About the author

Anwesha Mukherjee

Anwesha Mukherjee is a Digital Media Publisher and freelance writer. She has been working in the publishing industry for over 6 years now, holding various positions at different publishing houses across India. Her work experience includes managing marketing campaigns, content development and website maintenance for various industries including healthcare, IT, finance and education.

She also offers ghostwriting services to help aspiring authors get their book published while maintaining creative control over the project.

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Anwesha Mukherjee

Anwesha Mukherjee is a Digital Media Publisher and freelance writer. She has been working in the publishing industry for over 6 years now, holding various positions at different publishing houses across India. Her work experience includes managing marketing campaigns, content development and website maintenance for various industries including healthcare, IT, finance and education.

She also offers ghostwriting services to help aspiring authors get their book published while maintaining creative control over the project.

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