Buying a house involves a series of decisions that can have an impact on your life for a long time. Firstly, you need to decide whether you should rent-or-buy a house. If you decide to buy a house you then need to consider looking for the perfect home for your family. But there’s one major decision that has an impact on your financials that requires careful consideration. It’s the ‘Fixed or floating interest rate’ home loan decision. You might get confused between the both as to which is more beneficial for you? Well, here are some pointers that would help you to decide which one to go ahead with.

Fixed-rate home loan

In a fixed rate home loan, the interest rate is fixed at the time of taking the loan. Apart from a regular fixed-rate product where the rate of interest is persistent over the entire term of the loan, there are variants available which allow you to fix your loan interest rate for specific periods and is available with the right of reset by the lender.

Opting for a fixed rate home loan gives you a sense of sureness since you know what your repayments will be right from the time of taking the loan, giving you the confidence to budget accurately and plan your finances well. Usually, the fixed-rate loans are priced slightly higher than floating-rate loans. But if the difference is quite large, you may be drawn towards floating-rate loans. But if they are almost at par or if the difference is minimal, then you need to analyze your situation and needs and decide whether to opt for a fixed-rate loan or a floating rate loan.

Floating rate home loan

Floating rate home loan is also referred to as ‘adjustable-rate home loan’, these loans are linked to the lender’s benchmark rate, which, in turn, moves in sync with the market home loan interest rate. If there is a change in the benchmark rate, the interest rate on the loan also changes dependently.

The home loan interest rate on such loans is reset at specified intervals. It could be every quarter or half of a financial year or it could be unique to each customer depending upon the date of the first disbursement of the home loan. If there has been a change in the market rates during the review period, your interest rates too would be reset higher or lower as the case may be. In cases of such rate resets, it is usually the tenure of the home loan that gets adjusted again to account for the changed interest rate. If the home loan interest rate increases, your remaining loan tenure would be extended and vice-versa.

However, one cannot say that one type of loan is better than the other; selecting the fixed option or floating home loan interest rate option will depend on your needs and preference. You need to consider the factors discussed above to select the option that suits you the best. Though your choice of home loan has a material impact on the eventual cost of a home, you still have the flexibility to change how the home loan interest rate is levied on your loan depending on the circumstances.