The Pros and Cons of Fixed vs. Variable Home Loan Interest Rates: Which is Right for You?

6 mins reading

Last updated on 26th February 2024

Planning to buy your first home with a home loan? Then, it is advised that you do a thorough research about your preferred bank and financial institution’s house loan offers before zeroing in on the one that suits your preference. Since home loans have a longer tenure than other loan types, it is absolutely important to strategize the repayment part even before approaching any of these financial institutions. This is because apart from the repayment of the principal amount, you will also have to pay your home loan interest rate, which can vary from one financial institution to the other depending on the loan tenure and the kind of interest rate option you go for – Fixed or Variable.

Table of Contents

What is a Fixed Interest Rate?

As the name suggests, the housing loan interest rate in this case remains fixed for the entire period of the loan tenure. For example, today if you opt for a fixed LIC home loan interest rate and the interest rate is set at 8.45% per annum, then it will stay the same for the entire period of your loan. There will be no fluctuation whatsoever in the future.

Benefits:

  • Planning Repayment is Easy – Since the loan interest rate is fixed from the beginning, it is easy to plan the payment of the EMIs for the entire tenure.
  • Greater Stability – Many borrowers prefer stability in their financial management, and with fixed interest rate, it is possible to do so.
  • Secure interest rates in the future – Many believe that floating rates that are market dependent can de-stabilize a person’s finances and make a huge dent in his or her pocket, in case the loan interest rates increase. Therefore, opting for a fixed rate is more sensible.  

   Suggested read: Best Bank for Home Loan Interest Rate

What is a Variable Interest Rate?

The variable or floating interest rate, as the name suggests, varies depending on the economic scenario and can increase and decrease, accordingly. In this case, when the interest rate drops, EMI amount becomes lower and when it increases, the EMI amount becomes higher. For example, the home loan interest rates today offered by State Bank of India is 8.45-9.5% per annum but a year later it might be less than 8.45% or could go higher than 9.5%; the fluctuation can happen either way. However, you should know that this increase and decrease in rate is based on a benchmark rate set by the banks and financial institutions that is revised every quarter.

Benefits:

  • Lower EMIs – The interest rate on a loan is less compared to fixed interest rates, which means a borrower has to pay a lower EMI on the loan.
  • Knowledge of market trends – Those people who have a good knowledge about the real estate market and foresee a drop in interest rates in the future choose to go for this option.
  • No charge on foreclosure or pre-payment of loan – By opting for a variable interest rate, a person gets the benefit of paying no charges in case of pre-payment or foreclosure of the home loan.

Fixed vs. Variable Home Loan Interest Rates

Fixed – Pros and Cons
Variable – Pros and Cons
The interest rate on the home loan remains fixed throughout the entire tenure of the loan.
The interest rate on the home loan varies from time to time depending on the economic scenario. So, there could be times, when a person might be paying a higher EMI compared to the fixed rate and sometimes it could be the lowest home loan interest rate in a while.
Banks set the fixed rates higher than the variable rates.
Banks set the variable rates slightly lower than the fixed rates.
If a person seeks stability in his or her financial management and is fine with paying a set EMI for the tenure of the loan, even if it is high, then a fixed rate is best suited
If a person is able to understand the fluctuations of the market and can adjust to the ups and downs it and is willing to pay higher EMI when rates are high and pay lower EMI when the rates are down, then a variable rate is best suited for him or her.
A penalty is levied on pre-payment or foreclosure of a home loan.
No fine is levied on pre-payment or foreclosure of a home loan.

Which Home Loan Interest Rate is Right for You?

The above table differentiates between Fixed and Variable home loan interest rates and should aid you in choosing the right option for you. However, the choice between variable and fixed must be decided based on your loan need, repayment capacity, financial planning, and your understanding of interest rate fluctuations. 

Another option that you might be interested in is the partly fixed + partly variable combination, wherein the initial 3-5 years, you opt for a fixed interest rate and thereafter, switch to the variable fixed rate after putting in a request to the bank or financial institution, you have borrowed from. Usually, these are allowed by most financial institutions. There is also a provision for going from variable to fixed option, but it might come at a hefty cost.

Suggested read: Fixed Interest Rate Home Loans

How to Check the Latest Home Loan Interest Rates?

In case you are looking to apply for a home loan soon and wish to learn about the current SBI home loan interest rates or HDFC home loan interest rates or that of some other banks, all you need to do is to visit their websites or applications to get the latest information. Further, using their loan calculator, you can plan your loan requirement, tenure, and interest rate. Today, from planning to applying for a house loan has truly become easy. In fact, at BASIC Home Loan, we not only offer online home loan eligibility and monthly emi checks but also ensure hassle-free document collection from home and complete loan fulfillment.  

So, whether you are opting for fixed, variable, or combined home loan interest rates, it is advisable to have absolute clarity with regard to your requirements, financial stability, and payment capability. In case, you are still not able to do it on your own, then you can seek guidance from the loan experts, who can help you in this regard and probably, assist you in getting a house loan at the lowest interest rate.

Published on 11th July 2023