Fixed Vs Floating Loan Interest Rates

The main pros and cons of floating home loan interest rates are mentioned in the table below:

Category	Cons	Pros
Suitability	Those looking for financial stability	Risk takers
Flexibility	Predictability is less over the long-term	Good for short-term loans
Cost	In case rates increase, cost will be high	In case rates fall, costs will be low
Initial Rates	The EMIs will be inconsistent	Interest rates are usually lower initially
Adjustment of Rates	Vulnerable if interest rates increase	Positive if interest rates fall

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What is Fixed Home Loan Interest Rate?

Under a fixed home loan, the interest rate will remain the same throughout the tenure of the loan, therefore, the EMIs will be constant. The home loan repayment will be easy as the EMIs will be the same. However, higher interest rates may be levied by lenders when compared to floating home loan interest rates.

Pros and Cons of Fixed Home Loan Interest Rates

The main pros and cons of fixed home loan interest rates are given in the table below: 

Category	Cons	Pros
Suitability	Not good for falling or volatile markets	Good over the long-term
Flexibility in Tenure	A fee may be levied to change from fixed rate to floating rate	EMIs will be consistent
Initial Rates	Higher	Financial stability since EMIs will remain the same
Fluctuations in the market	No benefits are offered if rates fall	Protection is offered if rates increase
EMI Predictability	Rates cannot change due to a drop	Budgeting is easier as the EMIs are fixed

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Difference between Floating Home Loan Interest Rate and Fixed Home Loan Interest Rate

The main difference between fixed and floating home loan interest rates are mentioned in the table below:

Category	Floating Rate Home Loan	Fixed Rate Home Loan
Rate Conversion	You may have the option to switch to lower or fixed rates	May have an option to switch to floating rate after a certain amount of time
Market Impact	Rate fluctuates and EMIs will change	No impact as EMIs is fixed
Prepayment Charges	No or low prepayment charges are levied	Prepayment penalties may be levied
Risk	Depends on market rate fluctuations	Minimal
Rate Changes	Interest rate will change on a periodic basis	Interest rate will remain the same

It is important to understand the differences between fixed and floating home loan interest rates before availing a home loan. You can visit BankBazaar to check the EMIs by using the home loan EMI calculator.

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FAQs on Fixed Vs Floating Loan Interest Rates

• What does a floating interest rate mean on a home loan?

  A floating interest rate is inked to a benchmark rate set by the lender, often influenced by the Reserve Bank of India (RBI). A floating interest rate, or tracker interest rate, can result in savings when interest rates fall. The floating interest rate will vary over time, depending on market forces. In other words, your EMI (Equated Monthly Instalment) can increase or decrease during your loan tenure. 

• What does a fixed interest rate mean on a home loan?

  A fixed interest rate is fixed for the entire loan tenure. Your EMI remains constant even if interest rates fluctuate. A fixed interest rate allows for planning and creates certainty; however, it may start at a higher point than a floating interest rate. 

• Why do floating rates start lower?

  Lenders often provide competitive floating rates to attract borrowers. As market forces and other conditions change, rates may increase. A floating rate is advantageous when market rates fall, while a fixed rate is safer when rates are expected to rise. Borrowers who do not want to deal with rate increases may consider fixing their rates. 

• Will I be taking a risk if I opt for a floating interest rate?

  Yes, there is an element of risk due to rates increasing resulting in a higher EMI. But it can also save you money if interest rates decrease - if you have a flexible budget, you might benefit more in the long run.  

• When should I use a floating rate loan?

  Use a floating rate loan when you are expecting interest rates to go down. They might also suit you for shorter loan tenures or if it looks likely, you will be prepaying your loan early. Floating rate loans generally have fewer foreclosure penalties. Keep in mind that your EMI may fluctuate over time. 

• When should I be going with a fixed rate loan?

  Fixed rate loans are generally suited to those who want consistent repayments. If you have a strict repayment budget and/or predict interest rates to increase, a fixed loan can help give you this no-nonsense option. It offers advantages for long-term budgeting. You may, however, pay more in the initial stages. 

• Does a floating interest rate affect long-term financial planning?

  Yes. Because your EMIs can vary with market fluctuations, resulting in inconsistent monthly outflows, budgeting becomes more difficult. This, in turn, can affect your savings goals or other financial planning commitments. Floating rates are simply more unpredictable than fixed rate loans where they allow for better forecasting. You will still have to constantly review your budget. 

• Are floating rate loans flexible?

  Generally yes. Many lenders allow prepayments or early closure of a floating rate loan without incurring additional fees. You can save on interest costs. You also have more options for repayment than a fixed-rate loan. 

• Which rate is better for long-term home loans: Floating or fixed rate?

  Floating rates may be more advantageous for a longer tenure loan situation, especially if positive market data indicates the rates will fall (and stay down). If so, then overall interest paid may be lower. This does come at the risk of uncertainty. Fixed rates may better suit a borrower that values a level of consistency. 

• Can I change from a fixed rate loan to a floating rate loan or from a floating rate to a fixed rate loan?

  Most lenders will allow you to change, with a small fee paid or re-processing of the document. It is important to assess to analyze the current markets and your own financial goals prior to switching. In some situations, there could be more risk, and the cost of change could outweigh any benefits. Always check the loan documents.