06 AUGUST, 2019

Since applying for a home loan has become straightforward than it was in the past decade, more people are able to fulfil their dream of owning a house. To encourage this trend, financial institutions are crafting home loan plans with attractive interest rates making it suitable for individuals and co-borrowers alike. Although eligible individuals can obtain a home loan quickly, the choice between the types of interest rates on them often leads to a dilemma in choosing the right home loan.
There are two types of interest rates on home loans, namely fixed interest rates and floating interest rates. Read on to understand the difference between the two thereby having a better knowledge of a home loan plan best suited to your needs.

Fixed Interest Rate


Just like the name suggests, this is where you as a borrower pay a fixed amount of money as instalments over the entire tenure of your home loan. The number of instalments remains the same over the decided time period.

Advantages

  • Fixed interest rates remain constant and are not affected by market fluctuations
  • Due to their predictable nature, fixed interest rates are considered more secure than  floating interest rates

Disadvantages

  • They are usually around 1% to 2.5% higher than floating interest rates for home loan
  • As they remain constant, you will need to pay the same interest rate even if interest rates reduce due to market movements

Additionally, the borrower must confirm with their bank whether the interest rate is fixed for the entire home loan period or only for a few years.
If you are willing to have a fixed monthly repayment schedule, a fixed interest rate will be the most suitable option.

Floating Interest Rate


Unlike fixed interest rate, floating interest rate changes according to market conditions. Home loans with floating interest rates are bound to a base rate offered by different lenders along with a floating element. Therefore, any change in the base rate influences the floating interest rates, making them change from time to time. The fluctuations in the floating interest rate are short-term due to their dependence on the market trend.
Lately, the floating interest rates are rapidly gaining popularity among homebuyers and as a result home loan lenders like banks are offering home loan interest rates at attractive floating rates

Advantages

  • They are less expensive than a fixed interest rate by 1% to 2.5%
  • A home loan with a floating interest rate is subject to market fluctuations. Therefore, these floating rates may temporarily increase in comparison with the fixed interest rate. 
    • The unpredictable nature of floating interest rate reflects on the home loan instalments making it challenging to plan your budget.
  • Disadvantage

    Nowadays, home loan borrowers take the help of home loan EMI calculators to estimate the monthly instalments of their loan. Lastly, the Marginal Cost of Funds based Lending Rate (MCLR) influence the base rates of loan lending organisations. MCLR is a minimum lending interest rate of the bank below which they will not lend money to potential borrowers.

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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.