Fixed rates Vs. Floating rates on Home loans
The fixed rates are when the rate of interest charged to the applicant remains fixed while securing loans. The applicant will have to continue to pay at the same interest rates despite any fluctuation in market interest rates. While in the case of floating interest rates, the applicant avails the interest rates as per the current market prevailing rates after the start process of the loan.
Explanation about the fixed rates:
A home loan at fixed interest rates ensures that the borrower has to pay the fixed installments irrespective of the fluctuation in the market during the loan tenure. Market fluctuations do not affect the fixed home loan rates, i.e., the interest rates remain the same no matter what the market conditions are. Most of the time, the monthly installments are made during the initial stage of the home loan, rates are used to pay out the interest, and when payments are made in a later stage of the loan’s monthly repayment, the principal is serviced.
Benefits of fixed rates:
[1] No change in the interest rates irrespective of the market fluctuations.
[2] A fixed-rate home loan assists in long-term planning and budgeting by enabling the fixed repayment schedule, which is easy to budget doesn’t fluctuate.
[3] It ensures financial security since customers need not expect future risks.
Floating rates of home loans:
The floating rates are the variable rates that are charged to the customer depending on the market rates. Even after the approval of the loan, the applicant’s interest rate chargeable gets varied as per the market trends. If the interest rates increase, the applicant has to pay higher prevailing rates, while if it decreases, the applicant can benefit from lower interest rates. The floating rates depend on the repo rate decided by the Reserve bank of India. When the repo rate increases, the bank’s interest rates get increased, while when the Repo rate decreases, the interest rates also decrease.
Benefits of floating rates:
[1] The rates fluctuate as per the market trends and changes in repo rates.
[2] As per the current market rates, the repo rate is continuously falling; hence the applicants can always positively benefit from the floating interest rates on loans.
[3] The floating interest rates during the fall down period are beneficial to the customer as the applicant can save money on interest.
Comparison between the floating rates and fixed rates:
Fixed-rate home loans have fixed interest rates during the tenure loan, and this is not privy to change no matter what happens—floating interest rates change with the market conditions as and when the repo rate decreases. Home loans that are offered on the floating interest rates are attached to the best rate. In the case of fixed interest rates, the interest rate is higher as compared to the floating interest rates.
Working of fixed and floating rates work:
In India, the floating interest rates are not varying consistently. The reserve bank of India has urged the banks to reduce the interest rates for customers. However, the banks lower the prevailing rates for new customers and change them later on with the financial market. Older customers may continue to pay fixed charges and do not enjoy the lower interest rates applicable to new customers. When the interest rates come down, the floating rate on EMI in a floating rate home loan is often, and only the floating rate of tenure of the loan is altered. The reset clause is subject to revision. Though the nature of the loan depends on the bank’s period or with a sharp hike in interest rates is revoked.
We can assume that as per the current scenario of continuous falling of interest rates of the bank interest on lending as well as falling repo rate, it is recommended that people should better opt for floating interest rates rather than fixed interest rates as the customer may most of the times benefit from falling rates of home loans as well as save on the interest repayment liability. Also, the interest on fixed rates is higher than floating interest rates; hence, it is also recommendable to opt for a floating rate.
