Let's Compare Floating And Variable Home Loans

Buying a home is a significant decision, and so is selecting the correct type of loan. However, with various loan options (fixed, floating, variable), it can be confusing enough, especially while applying for the first time. 

If you are wondering which would be better, a floating or a variable home loan, this article is for you. Let's break down these terms to understand how they can impact your EMI and overall loan cost. 

In many countries, floating and variable home loans are the same. However, market conditions influence the interest. However, in some countries, these two types of loans have some distinct features. Thus, to understand them, let's get to know what floating and variable home loans are:

Floating Home Loans

Market interest influences the floating or adjustable interest home loans, which have a frequent connection with the lender's base rate. Since the interest fluctuates with the market, you pay less EMI when the market interest falls. On the other hand, you pay more EMI if this goes up. 

Variable Home Loans

It is a type of loan without a fixed interest, and here, a specific reference rate has an impact on the interest. Variable home loans can also combine fixed and floating rates. 

Why Do Banks Offer Floating/ Variable Home Loan Rates?

Lenders offer floating or variable home loans depending on the market, allowing borrowers to pass this change in the economy. 

Pros Of Floating/ Variable Home Loans

Although floating and variable home loans are almost similar, there can be a little difference. 

While variable loans are initially predictable, their predictability decreases when they become market-linked after a few years. However, floating home loans are unpredictable from the beginning.

Based on this difference, the pros of these types of home loans are listed below:

Pros Of Floating Loans

• Lower starting rates compared to the fixed rates.

• Benefit from the decreasing rate immediately.

• Can lower your overall interest cost.

Pros Of Variable Loans

• Stable payment at the beginning.

• Easier for budgeting early expenses. Hence, manageable.

• Flexibility on long-term repayment.

Which One Should You Choose For Your Home Loan? 

Choose floating home loans if:

• You are okay with the ups and downs of the EMI. 

• There is a chance that the EMI rate will drop. 

• You want to pay less over the long term. 

Choose variable home loans if:

• You want a predictable EMI for the first few years

• You will need a few more years to settle into your finances

• You expect to refinance or prepay your loan later

Questions To Ask Your Lender Before Taking A Home Loan 

Before signing any home loan papers, understand the terms and conditions of the loan you are going to accept. To have a better understanding, you should ask these questions:

• When and how often will the home loan interest change? 

• What happens if the rate rises sharply?

While the terms "floating" and "variable" are often used interchangeably. However, they can mean slightly different things depending on the lender. Always ask for clarity from the lender. Both loan types come with their benefits, and the right choice depends on your financial condition and financial goals. Thus, before choosing your loan type, consider these factors. Then, pick the right one!