The question arises: Which is better, floating vs fixed interest rate? Floating interest rates are slightly lower compared to fixed rates. If you need clarification on floating vs fixed interest rate, we will briefly discuss the key differences between the two interest rates.
After much debate about location and the area of convenience, Amir and his wife Asma finally planned to buy an apartment in Banani. While Amir sought travel convenience, Asma sought instant access to all household essentials. The couple has decided on a 2-BHK apartment that suited both of their expectations. Both are very excited about this huge initiative.
However, they still could not decide about financing, so they ended up taking a home loan. While Amir thinks a fixed rate-based home loan would be safer, Asma thinks a floating rate is much better. Amir and Asma are fine and trying to determine the best option to pick and choose a home loan. Let’s help them decide on the best interest rate option by looking at the difference between fixed-rate and floating-rate home loan interest.
What is a Floating vs Fixed Interest Rate?
A fixed interest rate sounds like – a fixed rate. This means the interest rate on the loan you opted for will remain unchanged. This interest rate is fixed for the loan term or at least a part of the term. A floating interest rate is when the chosen interest rate is subject to change throughout the loan. These changes occur due to the difference between the market rate and the ‘adjustable rate.’
Floating vs Fixed Interest Rate of Interest
- Market Conditions: A fixed interest rate is not affected by fluctuations in financial markets. The fixed interest rate remains fixed for the entire life of the loan. On the other hand, changes in financial markets affect a floating interest rate. Therefore, rates may vary based on market fluctuations.
- The fixed interest rate is higher than the floating interest rate. Fixed interest rates are generally 1% to 2% higher than floating interest rates.
- EMI A fixed interest rate, monthly EMI remains fixed throughout the loan tenure. This is because interest rates are fixed in nature. The EMI is affected by changes in the MCLR or interest rate regarding floating interest rates.
- Budget: With a fixed interest rate, you can plan your budget, determine how much you need to cash out every month, and manage your monthly expenses. Due to fluctuating market conditions, interest rates are affected, resulting in monthly changes in EMIs. It also makes budget planning somewhat difficult.
- Nature of Interest Rate: A Fixed interest rate provides security as it is constant. Market changes do not affect loan interest rates. Floating interest rates allow savings to grow because market changes affect interest rates. If the market records a downward trend, the interest rate automatically decreases, and you have to be cashless in EMIs and total repayments.
- Loan Tenure: A fixed interest rate is preferable for short- or medium-term loan periods like 3-10 years. Because changes in market conditions do not affect interest rates, you must still pay the fixed interest rate if the market is downturned. This will take away the advantage of cashing out smaller amounts. A floating interest rate is preferable for 20 to 30 years. As the market continues to change, a downward trend will be beneficial because of the changes in the total payout.
- Sanction for early loan payment: With a fixed interest rate, you must pay if you prepay the loan amount. No prepayment charges with floating interest rates.
- Age group fixed interest rates are suitable for persons aged 50 years and above. A floating interest rate is suitable for persons aged 20 years and above.
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| Fixed interest rate | Floating interest rate |
| · The fixed rate of interest is not affected by changes in market conditions.
· The monthly EMI remains fixed in case of a fixed rate of interest. · You can easily plan a budget for the entire repayment period. · Provides security. · It is suitable for loan periods of 3-10 years. · Prepayment charges apply. · It is suitable for people aged 50 years and above.
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· Floating rates of interest are affected by changes in market conditions.
· Lower floating rates of interest. · The monthly EMI varies according to the interest rate or MCLR. · You have to be flexible when it comes to budget planning. · Allows for increased savings. · It is suitable for loan periods of 20-30 years. · There are no prepayment charges. · It is suitable for people aged 20 years and above.
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Read Also: What Qualifications Need for Public Finance Investment Banking Job.
Advantages and Disadvantages of the chosen Interest Rate
Fixed-rate
An advantage of fixed rates is that you can be sure of the interest payments you will have to make, so there will be no surprises at the time of payment.
It may be stated as a disadvantage that you do not receive any benefit if interest rates fall during the life of your loan.
Variable rate
As variable interest rates are generally composed of a reference index plus a plus, even if the plus is known (for example, Libor + 2%), the amount of interest is uncertain since Indices, such as Libor, vary daily. So, unlike fixed-rate transactions, you need to know how much you will have to pay the bank for your loans in these operations.
The advantage of a variable rate is that if the rate drops, you will benefit as you pay less interest. But this becomes a disadvantage if the rate rises.
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Conclusion
Well, both interest rate options are the best. They are articulated to suit people’s needs, preferences, and financial profiles. You can re-read everything above and choose which will suit you best. If you are a risk taker and age under 50, you can opt for floating interest rates. If you are under 50 but looking for security in terms of financial planning, you can go for a fixed-rate home loan interest. It’s your choice!
People Frequently Asked the Questions
What is the best interest rate for a mortgage?
The best-fixed rate mortgage for December 2023 is the Caixabank Fixed Mortgage, at 3.04% APR. The ranking is completed by the Imagin Commission-Free Fixed Mortgage (3.45% APR), the Targobank Fixed Mortgage (3.47% APR), the BBVA Fixed Mortgage (3.50% APR) and the Bankinter Fixed Mortgage ( 3.60% APR).
What is better, floating vs fixed interest rate?
The fixed and variable interest rate on a mortgage: What are they?
While the fixed interest rate gives you greater security about your mortgage loan payments, the variable interest rate can benefit you, although some consider it ‘risky’.
What is better, a mortgage with floating vs fixed interest rate?
A fixed mortgage will give you the stability you need if you prefer always to pay the same amount. And if you want your payments to be low (at least the first months), with a variable mortgage, you will pay less in the short term, but you will run more risk of the Euribor rising.
When do variable mortgages go down?
According to Funcas’ calculations, the first drop in variable mortgage payments would only take place in April of next year for those whose review is annual. If the review is semiannual, the decrease will begin to be noticed in January 2024.
What is a floating interest rate?
When the exchange or interest rate is not defined a priori but depends on the market.
How is the floating interest rate calculated?
Floating Interest Rate
If the DTF value is 7%, the interest will be 9% (7% + 2%). If another period is to be calculated and the DTF is now 7.5%, the interest rate will be 9.5% (7.5% +2%).
