Thinking of taking a Home loan? So know what is better between fixed and floating rate

If you are also planning to buy your home and are thinking of taking a Home Loan for it, then this news can prove to be beneficial for you.

After taking a home loan, the amount that a customer pays with the bank includes the interest rate and the principal amount, which is called Equal Monthly Installment or EMI. You can choose between a fixed rate home loan and a floating rate home loan for the interest rate of the loan.

What is fixed and floating rate?

On Fixed Rate Home Loan, your EMI does not change for the entire loan tenure. This can prove to be beneficial as interest rates are likely to rise going forward.

Whereas in floating rate, the interest rate of your home loan is decided on the basis of the floating rate along with the base rate.

In such a situation, the fluctuation of the base rate has an effect on the EMI.

This is beneficial when interest rates are expected to come down in the future. At present, the minimum interest rate for home loans is 6.70 per cent. In fixed-rate, banks fix the interest rate of the home loan in the beginning.

This rate is applicable for the entire tenure of the loan. At the time of taking the loan, it is known that how much installment of Rs.

However, in the meantime, you have to keep in mind that the interest rate of a fixed rate home loan can be around 2.5 per cent higher than that of a floating rate loan.

Therefore, only if the Reserve Bank of India (RBI) hikes the repo rate in the coming years, can a fixed rate home loan prove to be beneficial.

Banks also offer mixed rates

Few banks or NBFCs offer home loans at fixed rates for the entire tenure. Most banks, barring a few, offer home loans at compound rates (fixed and floating) for the entire tenure.

These banks offer home loans at fixed rates for a few years. After this, you have to pay the installments according to the revised interest rates.

What should I do to pay the EMI on time?

You should save and keep the amount with you as an emergency fund to pay the EMIs on time.

This fund can help you in dealing with financial crisis. If something bad happens in your life, like if you lose your job, or you get sick, this fund can come in handy. This will not affect your ability to repay the loan.