Fixed-rate home loan

The interest rate on a fixed rate home loan is determined before you take out the loan. If a person selects this option, he will have fixed EMIs (Equated Monthly Instalments) for the duration of the loan. The interest rate will not fluctuate regardless of market interest rates (Repo Rate). As a result, we can determine the amount of money we will have to pay as EMI in advance and manage his budget appropriately.

Pros

• Throughout the duration, this has remained stable.: The key advantage of fixed- interest-rate financing is that your rate remains constant even when market prices fluctuate, which occurs when the Reserve Bank of India alters the rate at which banks may borrow and lend.
• Assists you in budgeting: Borrowers can lock in their interest rate and manage their other finances in a fixed-interest-rate situation. If you choose this interest rate, you will know precisely how much each payment will be during the loan's term.
• Is simple to grasp: Fixed-rate mortgages are simple to comprehend and vary little from one lender to the next. They might be an excellent alternative for individuals who meticulously prepare their budgets, since this rate demands you to pay the same number of monthly instalments (EMIs) year after year for the duration of the loan.

Cons

• Is more expensive: Because the rate remains constant during the term and banks are unable to change interest rates, fixed interest rates are typically 1.5 percent to 2 percent higher than variable interest rates. Despite the regularity in instalment payments, this might increase the overall cost of your loan.
• Reduce your odds of paying less as interest rates fall. Even if interest rates fall in the market, people who have chosen a fixed-rate interest rate regime would see their EMIs remain the same and will not be able to profit from any rate drop.
• When interest rates are high, it is difficult to get: When interest rates are high, qualifying for a loan becomes more difficult due to the requirement to make larger instalments.

Floating rate home loan

The interest rate on a variable rate loan fluctuates in response to changes in the repo rate. If the Repo Rate, which is based on the Reserve Bank of India's policy rates, rises, so will our home loan rate. Similarly, if the repo rate falls, so will our home loan rate.

The floating rates fluctuate at regular intervals, which might be every three months, depending on the conditions set by the bank. This is known as a reset, and the borrower will be informed of the frequency of the reset in the loan application. When the interest rate changes, either the loan term or the EMI changes.

Pros

• Is associated with the repo rate: These interest rates are inextricably tied to the repo rate, the rate at which banks borrow from the Reserve Bank of India (RBI). Home loans with fluctuating interest rates are less expensive in the long term when compared to fixed interest rates.
• Interest is applied to base salary: If you choose variable interest rates for your home loan, you must pay a base pay interest as an additional component of your loan. This base pay is just the minimum interest rate set by the lender, thus as the base rate changes, so does the variable rate. The RBI determines this based on a variety of economic considerations.
• It varies, but it is less expensive: Because floating interest rates are highly dependent on market developments, they change in the near term. However, it is less expensive than a set interest rate. While there is no maximum limit to the allowed rate hike, the borrower saves more even when the interest rate rises by 1-2 percent or more when a floating interest regime is chosen because as interest rates rise, the floating interest rate is generally adjusted so that the loan's tenure is extended rather than the monthly instalment. When market rates fall, floating rates are changed to reduce the term of the loan rather than the monthly instalment.
• There is no prepayment penalty: There is no prepayment penalty with floating interest rates. In the event of a variable interest rate, the RBI has prohibited any form of prepayment charge imposed on any transfer to a lower interest rate. This benefit, however, does not exist in fixed interest rates because the prepayment penalty condition remains if you end the loan before the specified payback time. Floating interest rates have recently gained appeal among house loan customers, with some public and private banks providing floating interest rates as low as 6.7 percent.

Cons

• Is unpredictability: The nature of floating interest rates is very unpredictable, making budgeting difficult for borrowers. As a result, because interest rates fluctuate so frequently, this option may not be suitable for someone seeking predictability and consistency in their EMIs.
• It may be inconvenient: There are times when the interest rate rises to the point where it becomes slightly problematic for borrowers to pay their EMIs. This is since they are extremely dependent on market circumstances, which may be unexpected.
• Premiums may be raised: When the market is unfavourable, financial institutions may demand more premiums than the benchmark rate, putting a strain on borrowers' finances.
• It makes financial planning tough: When the interest rate on loan changes, the EMIs may also vary. This might make your experience and monthly financial planning more unclear. Furthermore, you may only save if the variable interest rate does not remain above 11 percent to 11.5 percent for an extended period of time.

Differences between Fixed and Floating Interest rate loans

• The main distinction is that the interest rate on a fixed-rate loan is greater than the interest rate on a variable rate loan. When deciding on a loan, we should keep this in mind.
• Another significant distinction is that in the case of a variable rate loan, the interest rate has the potential to rise or fall. As a result, if someone chooses a fixed rate when applying for a loan, but interest rates fall in the future, they will not be able to profit from the reduced rates.
• If someone believes that interest rates are low at the time of loan application, he may choose for a fixed interest rate loan so that they may benefit from the low rate throughout the duration of the loan. However, if he believes that the interest rate cycle will have many ups and downs over the loan term, he may choose a variable rate loan to benefit from the shifting rate cycle.
• Another distinction is that adjustable-rate loans do not have a prepayment penalty. This implies that if we receive a windfall, like as a festive bonus or inheritance, we may pay down our house loan (in part or in full) without penalty. In the event of a fixed-rate loan, however, we will be charged a pre-payment penalty if he chooses to pay off our loan before it matures.