When you plan to take a home loan, one of the crucial factors to consider are the interest rates. Lenders offer attractive and competitive interest rates which makes choosing the best for the borrower daunting.
However, when comparing the interest rates, it is important to check if the interest rates are fixed or variable. Both options have their advantages and disadvantages, so it’s important to understand the difference between the two before making a decision.
In this article, we will explore the key differences between fixed and variable interest rates.
Fixed Interest Rates
A fixed interest rate is one where the interest rate remains the same during the entire course of your loan tenure. This means that your EMIs will remain the same for the entire term of your loan, regardless of any fluctuations in the economy or changes in the market. Borrowers who prefer predictability and stability in their EMIs.
The main advantage of a fixed interest rate is that it makes budgeting and financial planning easier as you know the cost of your monthly EMI. Additionally, if interest rates rise, your fixed-rate won’t change, so you won’t be affected by any increases in the market.
Fixed interest rates tend to be slightly higher than variable rates, as they offer greater predictability and security to the borrower. However today, home loan interest rates offered by lenders are attractive and competitive.
Variable Interest Rates
A variable interest rate, on the other hand, is one where your interest rate changes as per market fluctuations during your entire loan tenure. This means that your monthly payments may go up or down, depending on the state of the economy and changes in the market. Variable interest rates are often preferred by borrowers who want the potential to take advantage of lower rates.
The main advantage of a variable interest rate is that it can often be lower than a fixed rate, especially when interest rates are low. Additionally, if interest rates drop, your monthly payments will decrease, which can make it easier to manage your finances.
However, the unpredictability of variable rates can make it difficult to plan future finances as there is no standard EMI cost you have to bear each month.
Key differences between Fixed and Variable Interest Rates
The below table shows the differences between the two types of interest rates.
| Fixed Interest Rate | Variable Interest Rate | |
| Definition | Interest rate remains the same throughout the loan term | Interest rate can change over based on market situations |
| Duration | Longer-term loans (up to 5-30 years) | Shorter-term loans (up to 1-10 years) |
| Cost | Cost is high | Cost is low |
| Risk | Less risky as the interest rate is the same | Very risk as the rates keep on fluctuating. |
While choosing between the two, you also use the Home Loan Calculator on your lender’s website to get an idea of the EMIs at interest over the tenure to better manage your finances.
Factors to Consider
When deciding between a fixed and variable interest rate, there are a few key factors you should consider.
- Risk Tolerance: If you want to play safe, it is better to go for a fixed interest rate as it offers stability and predictability than variable interest rates.
- Economic Conditions: Do an analysis of the economy before choosing between the two. If you feel that the economy will be fluctuating or a rescission is about to come, then you should opt for a fixed interest rate. Otherwise, you can opt for a variable interest rate as the rates might go lower.
- Loan Tenure: If you’re taking out a short-term loan, a variable rate may be more suitable, as any potential increases in interest rates are unlikely to have a significant impact on your monthly payments. Otherwise, you can opt for variable interest rates.
Conclusion
Making the choice between a fixed and variable interest rate is crucial since it can have a big effect on your finances. The greatest choice for you will ultimately rely on your unique situation and financial objectives. A fixed-rate can be a better choice if you’re risk-averse and want certainty and consistency in your monthly payments. A variable rate, on the other hand, can be more acceptable if you’re okay with a certain amount of risk and want the chance to benefit from cheaper rates.
