Fixed vs Adjustable Mortgage Loan Rates: How to choose the right for your need?
Interest rate occupies the center stage in home mortgage loans. The interest rate determines your net monthly outgo and helps you plan accordingly. The mortgage loan interest rate is of two types – fixed and adjustable. The difference between the two is that while the fixed rate remains the same throughout the loan term, the adjustable rate swings up or down depending on the base rate or MCLR (Marginal Cost of Funds based Lending Rate).
Understanding the detailed difference between fixed and adjustable rates of mortgage loan is crucial for making the correct decision. This article simplifies the concept for you so that you can make an informed choice.
Fixed Rate of Interest Explained
As the name suggests, the fixed rate of interest remains unchanged month after month until the loan term ends. Generally, when you repay the loan in the form of EMI, the repayment amount includes principal and interest. While one part of the EMI is the principal, the other part is the interest.
During the initial years of the loan term, the lion’s share of your EMI goes towards repaying the interest, and a minor portion goes to principal repayment. The more you proceed towards the end of the loan term, the share of principal increases. Some intelligent borrowers prepay a part of the loan principal during the initial years to reduce the interest. While the reduction may not be reflected in your EMI amount, the lender will reduce the loan term to adjust the prepayment amount.
A mortgage loan EMI calculator can provide you with an exact estimate of the EMI division.
The fixed rate of interest offers many advantages. Firstly, your EMI amount remains static, ensuring better financial planning. Secondly, you are cushioned from the impact of sudden rate changes. Thirdly, fixed rates can be understood easily. However, on the flip side, the fixed rate can be excruciating when the rate is on the higher side. Since the fixed rate usually remains 1% to 2% higher than the fixed rate, this can make you spend substantially higher than an adjustable-rate loan. Additionally, a high rate of interest also means your loan eligibility will be low.
Adjustable Rate of Interest Explained
Unlike the fixed rate, the adjustable rate home mortgage loan interest may change after a few months or years after your availing of the loan. The rate change usually depends on the MCLR or base rate set by the Reserve Bank of India. However, some financial institutions increase or decrease the rates depending on their financial capability.
Although the upfront cost of repaying the loan (EMI) might seem less with the adjustable rate, you must consider a few factors before going with the adjustable rate.
The first thing you must consider is the broad market sentiment and rate of inflation. If inflation is gradually increasing, the rates will most likely increase. So, it is prudent to consider the financial implications of a rate hike before proceeding with the adjustable rate of interest. Another thing you must think about is the frequency of the rate hike. Generally, lenders increase or decrease the rates every three months, provided the RBI changes the rates. If the RBI becomes protective, your loan rates may go up.
You may use a mortgage loan EMI calculator to check the net difference between a fixed-rate loan EMI and an adjustable-rate loan EMI before deciding.
Fixed-Rate or Adjustable-Rate – Which is Better?
Whether to choose the fixed or adjustable rate for your home mortgage loan ultimately depends on your financial capability and risk-taking ability. If you are a conservative borrower with a fixed monthly income, you should prefer the fixed rate. In contrast, if your income is high or the chances of an income hike are higher, opting for the floating rate will be a better decision.
Reputed lenders offer beneficial and attractive features for fixed and adjustable-rate customers. You can also manage a discounted rate if your credit score exceeds 800 or your existing relationship with the lender. Use a mortgage loan EMI calculator to get an accurate estimate of the EMI amount before deciding.