What is a Floating Interest Rate? Features & Benefits

If you do decide to borrow money by applying for a loan in India, then one thing that you will need to think about is whether to go for a floating or fixed interest rate.

Home buyers particularly prefer floating interest rates since they tend to follow the market, providing cost-saving opportunities when there is a reduction in interest rates due to fluctuations. This article explains what a floating interest rate is, its key components, pros and cons, as well as how it influences home loans in India. In addition, we will consider handy tools such as housing loan interest rate calculators in India that may help in financial planning.

What is a Floating Interest Rate?

Home loan floating interest rates in India change periodically on factors such as moving external market benchmarks such as the Reserve Bank of India’s (RBI) repo rate, liquidity cost of financial institutions and other factors intrinsic to each NBFC. Unlike fixed ones whose values do not change until they are fully paid off, these might increase or reduce over time due to prevailing economic conditions.

Most institutions offering residential credit provide both fixed and floating interest rate options. While floating rates may initially be slightly lower, they can sometimes increase significantly, surpassing fixed rates. It's crucial to understand that floating rates can be highly volatile.

Also read: How to reduce interest payment on Home Loan?

Key Characteristics of Floating Interest Rates

• Changes with market conditions: The primary trait of this type of rate is that it fluctuates depending on how well the economy is doing. When the RBI decides to change repo rates, home loan lenders often adjust their floating rates as well.
• Starting with lower levels: Typically, floating rates start lower than fixed rates. This means that fewer EMIs.
• Potential for Savings: With a floating rate, you get reduced EMI which means that the total interest paid goes down when the rates fall, leading to savings.
• Flexible Repayment Period: The repayment period under floating rates is not constant either. You may even find your term extended in case of a significant rate hike.

Benefits of Opting for a Floating Interest Rate

By choosing a floating interest rate, borrowers can access various benefits related to cost savings solutions. Let’s discuss now:

• When interest rates in the economy fall, it results in lower EMIs, enabling borrowers to save finances throughout the repayment period.
• Many banks in India do not charge a prepayment penalty for floating-rate loans. This allows borrowers to make additional repayments when they have extra funds, reducing their interest burden.
• Floating interest rates may prove more economical than fixed rates over long tenures, especially for home loans spanning 10-20 years.

Also Read: A Complete Guide to the Different Types of Loans Available in India

Calculating Floating Interest Rates with a Housing Loan Interest Rate Calculator

To accurately assess the impact of floating rates on your home loan EMI, you can use a housing loan interest rate calculator in India. This tool calculates your EMI based on the principal loan amount, interest rate, and tenure, providing an estimate of your monthly outflows. Here’s how it can be helpful:

• Testing a Scenario: Through the use of online calculators now, it is possible to insert varied interest rates into them so that one can know how market changes affect the Equated Monthly Installment (EMI).
• Adjusting Tenure: If one adjusts the period then one is able to estimate what an alteration in rate would mean for your debt overall.
• Informed Decisions: You are therefore in a position to make a judgment on whether you can afford interest swings through computations based on such data.

Such calculators, available on the websites of most banks and financial institutions, provide clarity and confidence to borrowers, helping them make informed decisions on home loan floating interest rates in India.

Floating Interest Rates in the Indian Market

The Indian financial landscape is characterized by fluctuations influenced by RBI’s monetary policy. With fluctuating rates, it’s essential to stay updated on RBI announcements and rate changes, as they directly influence your EMI outflow on floating-rate loans.

Pros and Cons of Floating Interest Rates

While floating interest rates offer several benefits, they come with their own set of challenges. Here’s a balanced look at both sides to help you decide if they’re suitable for you:

Pros:

• The initial rate is often lower, making EMIs affordable for first-time homebuyers.
• If rates drop, you enjoy lower EMIs without needing to renegotiate your loan.
• Lenders may extend your tenure instead of increasing your EMI if rates rise.

Cons:

• In a high-inflation environment, EMIs can increase, placing a strain on monthly finances.
• Budgeting becomes challenging since you cannot predict future rate changes.
• The volatility can be stressful, particularly during economic downturns when rates increase.

Is a Floating Interest Rate Right for You?

Choosing between a fixed and floating interest rate requires evaluating your risk tolerance, financial stability, and market outlook. A floating interest rate could be ideal if:

• You expect rates to go down and so you are looking to cash in on lower monthly instalments.
• Having varied monthly installments that can be accommodated within the constraints of your income potential is another way of repaying your loan comfortably.
• You are considering prepayment options, as floating rates typically come without a penalty for early repayment.

The Bottom Line

Floating interest rates have been found appropriate for most people buying houses. This applies to people especially in India, where it is used as a common practice due to its flexibility and possibly low costs that may be incurred by a borrower who selects this type of interest rate. However, changing EMI could lead to financial stress before repaying their dues.

So, if you are flexible about your budget or have been through some cycles with rates before in other houses then you should consider a floating rate. Knowledge of various aspects of home loan floating interest rates in India is important to all categories of borrowers including new homebuyers and investors alike when deciding whether or not it is an appropriate financial path to take. Apply for a home loan today and utilize tools like a housing loan interest rate calculator in India to get an exact prediction of how much money you need so you can select floating interest rates as your best option.

Also Read: Home Loan: All You Need to Know – Godrej Capital

FAQs

Q.1. What are the benefits of floating interest rates?

A. Floating interest rates can be attractive for short-term borrowers as they often start at lower rates.

Q.2. What are the features of floating rates?

A. Yes. Floating rates tend to fluctuate frequently and can change significantly even within a single day.

Q.3. What are floating rate notes and their features?

A. Floating Rate Notes (FRNs) are bonds with interest payments that adjust periodically based on a reference rate. These are popular with investors expecting rising interest rates.

Q.4. Which loan is better, fixed or floating?

A. Fixed rates are typically slightly higher than floating rates. If you believe interest rates will rise in the future and prefer stability, a fixed-rate loan is a better choice.

Q.5. What are the risks of floating rates?
A. Floating rates carry more risk as they often involve lending to lower-credit-quality borrowers. The returns generally reflect compensation for the higher risk involved.

Disclaimer:

The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com.