Jul17
Analysis of Home Loan Interest Rates: Fixed vs. Floating
For most of us, seeking the financial support of a home loan is the only way to buy our dream home. In terms, dream home and home loan go hand in hand. And when loan comes into the picture, with it comes the stress of interest rate. Few of us fail to wrap our heads around the vast pool of verbiage and processes related to interest rates. One such is Fixed vs Floating interest rate.
Home loan is a prolonged financial commitment. While applying for a home loan, the bank provides two interest rates options - fixed and floating.
Floating vs Fixed Interest Rates
As the name suggests, floating interest rate varies throughout the loan tenure, depending upon the economic fluctuation. Floating interest rate comes with a base rate along with a variable rate window. If the market condition fluctuates, the base rate changes along with the variable interest rate. This in turn results in varied interest amounts and tenure.
Fixed interest rate on the other hand is quite simple to understand. They come at a pre-specified interest rate with a fixed tenure. Fixed interest rate is not subjected to market volatility.
Now the question arises - which one to opt for?
Advantages of Floating Interest Rate:
1) Benefiting from the market volatility:This has to be the biggest advantage of a floating interest rate. Floating interest rates enjoy the advantage of fluctuating market value. They are mostly favourable when you expect the market value to go south. While it's important to consider the possibility of market value rising, if you are opting for a shorter loan term it's likely that for most of your loan duration, you'll benefit from lower rates. Opting for a floating home loan interest rate could potentially save you on interest costs, particularly if you're uncertain about future home loan interest rate trends.
2) Early repayment penalty:Banks do not charge an early repayment penalty for foreclosing the home loan in case of Floating interest rate after a basic time threshold.
Advantages of Fixed Interest Rate:
1) Stability of financial planning:Having a fixed interest rate every month gives you the financial stability of a predictable expenditure. You do not have to constantly be wary about the market value. This helps you in planning your finances for the future in a more secure way.
2) Away from the complications: Let’s be honest, the floating interest rate might be a beneficial option to opt for and even save you a substantial amount of your repayable loan, but it is quite complicated to understand and calculate the market trends. Being up to date about the market value and the constant checking of the economic trends could be a worrisome task. Opting for a fixed interest rate might save you the hassle.
Both interest rate options come with their own advantages and disadvantages, but ultimately, the borrower holds the decision-making power. Therefore, it is crucial to make a well-informed choice.