Finance

How is a fixed-rate home loan better than a floating rate home loan?

Choosing between a floating rate and a fixed-rate home loan has always been critical for debtors. A floating rate means that your interest rate is determined by the current rate applicable in your country.

So, as interest rates in the economy rise or fall, so will the interest rate you pay. The interest rate on a fixed-rate loan is fixed when the loan is taken out. Aside from a standard fixed-rate product, where the interest rate remains constant throughout the loan’s term, variants are available that allow you to fix your interest rate for specific periods.

Here’s why we think you should apply for a fixed-rate home loan over a floating-rate home loan.

Drawbacks of a Floating rate home loan

While the fluctuating nature of the floating rate of interest can have some advantages, it can also be detrimental in ways like:

1. Varying monthly instalments

Your mortgage is paid off in EMIs. If you choose a floating interest rate, you should know that the monthly payment amount will fluctuate throughout the loan’s term. You must be able to predict your EMI and have that amount in your bank account so that you do not lag on your payments.

2. The interest rate is determined by market conditions

The interest rate on floating interest rate loans is heavily influenced by market conditions, which can be volatile and dynamic. If the interest rate rises to the point where it becomes difficult to pay the EMI, it can cause significant damage. It may impact your credit score records, and the lender may list you as a defaulter, which may impact future loan applications.

3. It makes budgeting difficult

Interest rates constantly change, making it extremely difficult to plan and budget your finances properly. This is because floating interest rates are unpredictable, and it will be challenging to determine how much interest you must pay. There may be times when your EMI exceeds what you expected or are comfortable paying. This can also have an impact on your monthly savings.

Why should you choose a Fixed-rate home Loan?

Fixed-rate loans generally have a higher interest rate than floating-rate loans. However, your loan tenure, EMI commitments, and total interest outflow are reasonably predictable, giving you the confidence to budget accurately and plan your finances.

Let’s go over the benefits of getting a fixed home loan:

1.  No Surprises

The main advantage of a fixed rate home loan is the certainty that your repayments will not change during the fixed interest period. You don’t have to be concerned about future higher payments like you would with an adjustable-rate mortgage. Each month, you pay off a part of the principal. You’ll know exactly how much money you’ll need each month and can plan accordingly.

2. Less Market Risks

If interest rates increase, having a fixed rate loan means you don’t have to pay any more until your fixed term expires. This can make it a good option if you’re concerned about interest rates rising and your repayments increasing. If you anticipate repaying the loan over a more extended period, a fixed rate is preferable, as a significant increase in interest may occur over the term of your loan.

3. Helps you plan your finances

If you are uncertain of your career path while purchasing a new home, a fixed home loan will provide you with the financial security you require. Because the interest rate remains stable and does not change, you will be able to budget all of your financial expenses properly. This will allow you to manage your household finances better and forecast your annual costs.

Over to you…

It’s difficult to say that one type of loan is superior to another. Although we advocate for fixed-rate home loans in this article, a lot depends on your needs, preferences, and financial profile. Keep in mind the factors discussed above before making your decision.

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