What to choose Fixed or Floating Home Loan?

What is Home Loan?

Any funds or amount availed from a bank or lending institutions at a particular rate of interest for the purpose of purchasing home or constructing one is a home loan. The repayment for home loan is done through EMIs every month by the loan taker. While advancing a home loan usually the property which can be either of commercial or personal in nature is taken as a security by the lenders or banks. In case the borrower is unable to pay the due amount of home loan the lender has the legal right to possess the property to recover the outstanding loan amount by selling it. However, there is still  difference between home loan and loan against property. There are several type of home loans that are available to the individuals in India. These are as follows:

  1. Land Purchase Loan
  2. Home Purchase Loan
  3. Home Construction Loan
  4. Joint Home Loan
  5. Home Improvement Loan
  6. Home Extension Loan
  7. Top-up Home Loan
  8. Home Loan Balance Transfer

Based on the flexibility of interest rate to be paid by the borrower the Home Loans are categorized into two:

  1. Fixed rate Home Loan
  2. Floating rate Home Loan

Home Loan in India

What is Fixed Home Loan?

When the home loan is offered by the banks and non-banking institutions at a fixed rate of interest, it is called Fixed Home Loan. In this type of loan scheme, the borrower has to pay an interest on the loan amount that is already fixed for the whole tenure of the loan. The borrower has to pay the loan amount in fixed monthly installments. Any fluctuation in the financial market does not affect the rate of interest in this type of loan scheme.

Advantages of Fixed Home Loan:

  • Even after serious fluctuation in the financial market the rate of interest is fixed.
  • There is no future risk involved thus, ensuring a financial security to the borrower.
  • It also helps in assisting in budgeting and long-term future planning through the fixed payment schedules.

Disadvantages of Fixed Home Loan:

  • The main disadvantage of fixed rate home loan is that they are 1-2.5% higher than the floating rate home loans. Making it expensive.
  • Most of the lending institutions have the fixed rate of interest up to a limited tenure period and not for the whole years of the loan tenure. Which means after the fixed interest rate tenure is over the customer is liable to pay the new rate of interest fixed by the lending institution.

What is Floating Home Loan?

When the home loans are offered to borrowers on interest rate that are subject to change as per the market fluctuation are called Floating Home Loan. The interest rates in this type of loan scheme always floats or fluctuates.

Advantages of Floating Home Loan:

  • The interest rates are usually lower in this loan scheme than the fixed rate home loan.
  • Borrower is allowed as per the Non-Banking Financial Company’s (NBFCs) rules, to choose a fixed monthly payment schedule suited to their needs.

Disadvantages of Floating Home Loan:

  • Interest rates change and fluctuate as per the market economics.
  • The interest rates are not fixed and are based or linked to the base rate of NBFC and Marginal Cost of Lending Rate (MCLR) of the Bank.

Which one to choose Fixed or Floating Home Loan?

The interest rate in the floating home loan is as low as 8.35% making them more attractive to apply for by the customers or borrowers. There are various types of loans provided by Indian Banks but choosing the perfect home loan fixed or floating as per the need of the borrower is more important and which one suits them is depended on their ability to repay the loan.

Author: Anil Agrawal
EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or anil@ezybizindia.in.