What is a Floating Rate of Interest?
As the name implies a floating rate of interest is one that varies according to the prevailing conditions in the market. Home loans that are disbursed on the floating rate of interest, are done so in relation to the base rate of a lender. Therefore, if there is a change in the base rate, there will be an impact on your floating rate of interest as well.
The benefits of opting for a floating rate of interest:
The one clear benefit that a floating interest on a home loan has been that it is cheaper than a fixed rate by at least 2 to 2.5%. Even if there were to be a case where a floating rate exceeds a fixed rate of interest it will only be for some period of your entire loan tenure as interest rates a cyclical in nature. Needless to say, floating interest rates bring in a lot of savings for the borrower when the interest rates soften in the market.
The drawbacks of opting for a floating rate of interest
The drawback of such rates is the impact they have on your monthly outgo as EMI. Given the uneven nature of floating rates, either your EMI may shoot up one fine month throwing your monthly budget out of gear or you may end up repaying substantially higher due to an increase in your loan tenure (EMI remains same). However, if you think that this aspect does not bother you, going in for a floating interest rate does indeed make sense.