Fixed vs Floating Home Loan rates - Which is better for you? - Home Loan Stories - Kotak Bank - Kotak Bank

16 AUGUST, 2019

For most of us, the biggest financial decision of our lives is usually when we are thinking of buying or building a house. Despite occasional fluctuations, real estate prices are still skyrocketing, making it impossible for the common man to buy a house without a loan.
Among other variables to consider is the question of whether to go in for a loan with a fixed interest rate or a floating interest rate.
Let’s try and understand the two better:

Fixed Interest Rates

Fixed interest rates on home loans mean you know for certain the amount that will go out of your account over a fixed period. This helps the borrower plan his expenditure comfortably as there are no surprises in the interest rates.

However, fixed interest rates come at a premium of a small percentage over the floating rates available in the market. Banks and other financial institutions face the market risk of rate fluctuations and hence impose the premium on the borrower to hedge the risk.
Fixed rates are favourable to those who do not want to peg their cash flow to the market fluctuations and want to have a certainty and security in it; for which they are willing to shell out a bit more in the form of interest expense.

Also, banks try to offer fixed interest rates for the first few years of the loan tenure and then expose the borrower to the market rate fluctuations.  The borrower must read and understand the fixed rate policy mentioned in the loan agreement to be completely aware of the loan repayment schedule.

Floating Interest Rates

Floating interest rates are based on the MCLR plus the margin component specified in the loan agreement.

The biggest advantage of the floating rate is that it comes at a slightly lower amount than the fixed rate. But due to the fluctuations in the market rates, the variance in floating interest rate from time to time may have a domino effect on the cash flow, which can potentially impact your monthly budget. If you are willing to take that risk, you can enjoy the discount in the interest rate.

As we can see, both the fixed and the floating rates have their advantages and disadvantages. When borrowing, we need to understand our unique financial position and decide accordingly. A fixed rate will bring in certainty and security at a small premium, while the floating rate will bring in benefit in the interest component but will increase market exposure.

Assess your financial health, budget carefully and take the plunge - your dream home should become a reality!

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.

Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.