Introduction to Property Buying

What is the difference between fixed and floating rate?

What is the difference between fixed and floating rate?

The most important thing for a borrower before he or she applies for a loan is the interest rate and this is the factor that determines whether the person will be taking the home loan from that particular financial institution or not. As applying for home loan is a big decision so is choosing the best rate of interest before finalising the loan.

Individuals who are applying for home loans need to choose between two different types of interest rates, which are fixed rate of interest and floating rate of interest.

Fixed rate of interest

Applying for the fixed interest rate means that the borrower will have to repay the loan amount in fixed and equal instalments during the entire loan duration. Advantage of this is that even if there are fluctuations in the financial market, the interest rates do not change. Therefore this is the first preference of people in an economy where the interest rates are expected to increase in the near future. Fixed rate, however, can be counter productive if the interest rates are reduced in future.

Floating rate of interest

By floating rate of interest it is meant that the rate of interest is volatile and changes as per the market scenario. The rate of interest depends on the base rate that different lenders offer and this is why if there is a change in the base rate then the interest also gets revised automatically.

Fixed rates of interest are usually 1- 2.5 % higher than floating rates of interest.

Difference between Fixed and Floating Interest Rate-

The chart below will help in understanding the differences between the two in the best way:

Fixed Rate Of Interest Floating Rate Of Interest
The rate of interest is high The rate of interest is low
Financial market conditions do not affect the rate, thus it remains unchanged Financial market conditions affect the rate, thus it may change
It is possible to plan according to a budget It is difficult to plan this according to a budget
There is a sense of security You can generate savings
This is best suited for short/medium term loans and in a scenario where interest rates are expected to rise in future This is best suited for long term loans

So, now that you know the difference between the two types of interest rates, you will be able to choose wisely for yourself.