Home Loan: Before taking a home loan, know this game of interest, you can save lakhs of rupees...

Buying a home is a big dream for everyone, but taking out a home loan to fulfill this dream often brings joy as well as anxiety. Especially when it comes to choosing an interest rate—fixed or floating rate. This decision may seem small, but it can directly impact your finances for the next 15-20 years.

Fixed Rate: Stable, but Expensive
The biggest advantage of a fixed-rate home loan is that your EMI remains the same every month. No matter how volatile the market is, your installment remains fixed. This makes budgeting easier and gives you peace of mind. But this stability comes at a price.

Typically, fixed-rate loans have an interest rate 11.5% higher than floating-rate loans. This means that the stability you enjoy initially can be a burden in the long run. If interest rates decrease in the future, those with fixed-rate loans lose out on the benefits. Consequently, you continue paying the same EMIs while others are paying lower EMIs.

Floating Rates: Cheaper but Riskier
Interest rates on floating-rate home loans fluctuate based on market conditions. They are linked to the repo rate, or the bank's benchmark rate. When market interest rates fall, your EMIs also decrease, offering a significant advantage. However, there's a risk: if the RBI raises rates, your EMIs could suddenly increase, potentially disrupting your monthly budget. However, in the long term, floating rates are generally cheaper than fixed rates, as interest rates don't remain high all the time.

Is Switching from Fixed to Floating Benefiting?
If you took out a loan at a high fixed rate and market rates have now fallen, a balance transfer could be a good option. This means transferring your loan to another bank offering a lower interest rate. Even a rate reduction of just 0.5% or 1% can result in savings of lakhs of rupees over the entire loan term. However, banks charge processing fees or transfer charges during this process, so be sure to consider these costs before making a decision.

Which loan is right for whom?
If you're new to your job, have a long loan tenure, and can withstand market fluctuations, a floating rate loan may be better for you. It offers flexibility and increases long-term savings. However, if you're nearing retirement or have a fixed budget, choosing a fixed or hybrid loan (one with fixed terms for some years and floating terms for the rest) is better. This will provide stability in your EMIs and reduce the risk of sudden increases.

Disclaimer: This content has been sourced and edited from TV9. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.