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Apply NowIf you are considering applying for a home loan or have done so recently, you would have come across two options: floating interest rate and fixed interest rate. Each of these is popular in its own way and has some unique advantages. However, given the increasing costs of loans right now, some experts believe it may be better to stick to a fixed interest rate loan.
Let us learn the difference between fixed and floating interest rates and how you can decide which is the right choice today.
If you opt for a home loan with a fixed interest rate, the rate of interest stays the same throughout the loan tenure. For instance, if you apply for a loan of Rs 50 lakh with a fixed interest rate of 8%, you will pay an 8% interest on all your Equated Monthly Instalments (EMIs) until the end of the term. The rate will remain unchanged.
On the other hand, if you select a floating interest rate, the rate of interest will vary throughout the loan term, depending on the market forces. So, your EMI payments will differ according to the prevailing rates. When the interest is low, you will pay a lower EMI; when the interest is high, you will pay more. There is no fixed value, and the overall cost of your loan will fluctuate.
As an inflation outcome, the Reserve Bank of India (RBI) increased the repo rate by 90 basis points (bps) in May and June 2022. The country is going through a high inflationary period, and increasing the repo rate is a measure to control its impact. Some financial experts expect another 50-75 bps hike in the coming months if inflation rises further.
The rising interest rate regime can be problematic for those saddled with a floating interest rate. When the RBI increased the repo rate with a 40 bps hike in May, the lowest home loan interest rate rose from 6.8% to 7.2%. In June, a hike of 50 bps increased the lowest interest rates from 7.3% to 7.7%. If the repo rate increases by 50-75 bps, the lowest home loan rates can go up to 8.5%.
When interest rates rise, lenders pass on the burden of high prices to borrowers. This usually translates to two options for the latter: a bigger EMI or longer loan tenure. Both options can be restrictive, leading to frugal living and difficulty in making ends meet. It can also dissuade buyers from purchasing a home or investing in the real estate sector.
Generally, a floating interest rate loan is recommended when the rates are expected to drop. This way, you can save money over time. However, given the present scenario, this is not likely to happen anytime soon. So, it may be better to opt for a fixed interest rate at the moment. A fixed interest rate can have several advantages, as listed below.
Here are some things to keep in mind when considering a fixed interest rate regime.
Conclusion
The choice between a floating and a fixed interest rate is entirely yours. Both options have their pros and cons, but a fixed interest rate home loan is advised in the current scenario of inflation and increasing interest rates. So, don’t delay your home purchase or stress over high rates. Instead, try to maintain a good credit score and apply for an IDFC FIRST Bank Home Loan for competitive fixed interest rates on home loans starting from just 8.45%.
Disclaimer
The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.
The features, benefits and offers mentioned in the article are applicable as on the day of publication of this blog and is subject to change without notice. The contents herein are also subject to other product specific terms and conditions and any third party terms and conditions, as applicable. Please refer our website www.idfcfirstbank.com for latest updates.