Fixed Vs Floating: Fixed rate home loan or floating rate, which option is more beneficial for you when

When you go to take a loan from the bank, the bank tells you about both fixed rate home loan and floating rate home loan. In fixed rate home loan, the interest rate is fixed at the time of taking the home loan. The EMI which is fixed with that interest remains the same throughout the loan period. On the other hand, floating rate loans are linked to the benchmark rate of the lender. If the benchmark rate changes, then their interest also changes. Most banks consider RBI's repo rate as a benchmark, hence whenever the repo rate decreases, floating rate loans become cheaper, whereas when the repo rate increases, these loans become expensive.

For this reason, they are also known as 'adjustable rate home loans'. In the case of home loans, many people consider fixed rate loans to be better, while some consider floating rate home loans, but if seen, both have their own advantages. Know when choosing which option will be beneficial for you.

When should you choose fixed-rate home loan?

- The first advantage of choosing the option of a fixed rate home loan is that at the time of taking the loan itself, you know how much EMI you have to pay. Whether the repo rate increases or decreases, your interest rate does not change. In such a situation, your EMI also remains the same throughout the period. This helps you in making your correct budget and financial planning.

- If you are comfortable with the EMI you have set, you can opt for a fixed rate home loan. Keep in mind that your EMI should not exceed 25-30% of your take-home monthly income.

- If you expect interest rates to rise in the future and therefore want to lock your home loan at the current rate, then you can opt for a Fixed Rate Home Loan.

- The cost of a fixed rate loan is usually slightly higher than a floating rate loan. If the difference is quite large, you can consider a floating rate loan. But if they are almost equal or if the difference is negligible, then you can opt for a fixed rate loan.

When to choose a floating rate home loan

- If you expect interest rates to come down in the coming days, then you can opt for a floating rate loan. In such a case, the interest rate applicable on your loan will also decrease, which will reduce the cost of your loan.

- Floating rate loans are good for those who are uncertain about the fluctuations in interest rates and prefer to stick to market rates.

- Since the rate of floating rate loans is usually marginally lower than that of fixed rate loans, this gives you some benefit in the cost of your loan. If you want to save some money on your interest cost in the future, you can choose this.

- One of the advantages of floating rate home loans is that when you make a prepayment, you are not charged a prepayment charge, whereas if you want to close the fixed rate loan before time, then the bank charges you a prepayment charge.

Disclaimer- (This information has been taken from HDFC's website.)