When you decide to buy a house, you have to make a series of important choices that you have to live with for years, sometimes even decades. Once you have decided to buy a house finalized a perfect property for your family, the next decision you would have to make is to choose a perfect lender and apply for a home loan.
When you are looking for a home loan, you will find multiple options, even when it comes to interest rates. Some lenders offer loans with floating interest rates while others come with a fixed interest rate. Clix Capital Home Loans give you the option to choose from the floating rate for the entire loan term, or a fixed rate for the first 2-3 years followed by a floating rate for the rest of the term.
Here, we will try to understand the differences between the two types of interest rates and find out which one can be more beneficial for you. Here are a few pointers that can help you make a decision.
Fixed Rate and Its Benefits
In a loan with a fixed rate of interest, the rate is fixed when you take the loan, after which it remains constant for the entire loan term. Apart from this, some lenders also allow you to have a fixed interest rate for the first 2 or 3 and then opt for a floating rate. Opting for a fixed interest rate gives a sense of consistency and certainty, as you know your liabilities right from the beginning. This gives you the confidence to plan your budget and monthly expenses accordingly. So, it gives a good measure to predict your loan term, total interest paid, and EMI amount.
Although there might be a slight difference between floating and fixed interest rate, you may feel swayed towards an option that offers you a lower interest rate. But if they are almost the same, you have to decide depending on your needs and situation. As a general rule, you must opt for a fixed rate loan under the following circumstances:
- If you are sure you can comfortably pay the EMIs you have committed to. The EMI amount should ideally not be more than 30% of your monthly income.
- If you foresee an increase in the interest rates in the future and you want to lock in the existing interest rate on your home loan.
- If the interest rate has reduced recently and you want to lock it in for your loan, then opt for a fixed rate plan.
Floating Rate and Its Benefits
Also called an ‘adjustable-rate loan’, floating rate loans are connected with the benchmark interest rate of the lender, which ultimately fluctuates as per the market rate. If the benchmark rate changes, the rate of interest on your loan will also change proportionately. Interest rates of such loans are reset at regular intervals, such as quarterly, half-yearly, or yearly. It can also be different from one customer to the other, depending on the time of loan approval and disbursal.
If the market rate changes during the review process, your interest rates will be affected and may go lower or higher, whatever the case be. If you don’t want your EMIs to be affected by market ups and downs, you may request the lender to adjust your loan term instead of increasing your decreasing your EMIs. For instance, if the interest rate increases, the lender may extend your loan term so that the EMIs remain almost the same. However, if you can adjust a little higher or lower EMI and you want your loan term to remain the same, you can choose that as well. Generally, you must opt for a floating rate loan under the following circumstances
- If you foresee a fall in the interest rate shortly, you may opt for a floating rate loan. If the rate actually falls, it will apply to your Ioan, as a result of which your loan cost will reduce eventually.
- If you have no idea about the interest rate fluctuations, it would be wise to go with market rates.
Combination of Fixed and Floating Interest Rate
If you are still not able to decide which type of interest should you opt for, it’s better to go for a combination of part floating and a part fixed rate of interest. This type of rate is particularly suitable for those who have other ongoing loan repayments that they have to finish within the first 2-3 years. During this period, a fixed rate of interest with no surprises is more suitable. After this, you can choose a floating rate of interest for the rest of the loan term.
Choice Based on Age Group
The decision between the fixed and floating rate of interest can be dependent on your age group. Here are a few scenarios that most people follow:
People in their late 40’s: These people often opt for a fixed rate of interest, as they still have several years before their retirement and they want to stay safe from fluctuations in their EMIs and interest rate. Moreover, they still have some debts they have to get rid of.
People in their late 20’s: These people often opt for floating interest rates, as they have a lot of time for loan repayment and they may have several dips in their interest rate during the loan term.
To summarise, no one can say that one type of interest rate is better than the other. The final decision depends on your financial profile, your personal needs, and preferences. Understand the two types of interest rates above and choose the one that best suits your requirements.
It is often difficult to predict fluctuations in interest rates. The market may move against your expectations and you may be left with an unfavourable interest on your loan. However, do not worry about going wrong with your decision.
With Clix Housing, you have the option to opt for a fixed rate for the first 2-3 years and then have a floating rate.
Looking forward to a home loan with an easy application and disbursal process? Look at none other than Clix Housing. Apply for a home loan here and opt for an interest rate type that best suits your financial preferences. With easy eligibility conditions and minimal documentation requirements, you can have your loan amount within a matter of minutes.
You can also reach out to us at firstname.lastname@example.org or call us at 1800 200 9898