Understanding fixed and floating rate of Interest

A Home Loan offers the perfect opportunity to purchase your dream home, without putting a strain on your income or even your savings. However, like any loan application, there are plenty of challenges to considers. The different aspects of the loans such as the principal amount, repayment tenure, EMI and even interest rate can play a pivotal role in your Home Loan application.

In the case of the Home Loan interest rate, you can opt between two types of interest rates. As the name suggests, the interest rate remains constant throughout the loan period. In the case of floating interest rate, it is subjected to be reviewed periodically.

Usually, the interest charged is higher in the former than in the latter. For example, a permanently fixed rate loan may cost you 14 percent interest, whereas a loan with a rate that is reviewed every three years may come at 13 percent. Moreover, there may be restrictions on the amount that can be prepaid in case of both types of fixed rate loans.

Benefits of Fixed Interest Rate:

• Interest rate remains fixed irrespective of the market conditions. This offers the ideal protection, especially against volatile conditions.
• Fixed Home Loan interest rates are best for those who are good at budgeting. It also offers the ideal option for long term budgeting.
• It also helps in long term planning in terms of certainty and security.

Benefits of Floating Interest Rate:

• One of the biggest benefit of the floating Home Loan interest rate, is that, it is normally lower than the fixed interest rate. For example, if you are getting a floating interest rate of 10.5 %, while the fixed interest rate is being offered at 12 %, you still save money if the floating interest rate rises by up to 2.5 % points.
• In the event your floating interest rate rises, it will be only during a short duration of the loan. It will not last throughout the whole duration of your loan tenure.
• Shorter loan repayment duration. This makes it an excellent choice for those who require additional loans in the near future.

Which is the best option for you?

It is up to you to decide on what interest rate suits your best interest. Ideally you should compare Home Loans for various parameters and understand every single detail about it. If certainty and security are prime considerations, a fixed rate Home Loan will be the best option, however it won’t come without the premium on interest rates. HDFC Bank offers competitive rates on its Home Loan, making it one of the best options in the market.

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Source: HDFC Bank