What are Flexible and Fixed Home Loan EMIs?

Planning for a home loan? You need to decide between a fixed home or a flexible home loan. There are various factors that you need to confirm. Here’s an insight into the difference between fixed and flexible loans:

What is a flexible loan EMI?

In a flexible loan, the EMI and rate of interest change in a reducing format. You pay an EMI and a rate of interest on the outstanding amount of the housing loan. The interest rate is not fixed. It varies as per the home loan eligibility of the borrower. As a borrower keeps paying monthly installments, the principal loan amount decreases. The rate of interest and EMI will now be calculated on the outstanding or pending housing loan amount.

What is the fixed home loan EMI?

A fixed housing loan is the most popular one. It comes with a fixed rate of interest and a monthly EMI. An individual needs to pay the fixed EMI every month till the end of the housing loan. The rate of interest is fixed and does not work on reducing the amount or balance. This helps in managing finances in the right order.

The Difference Between a Fixed Interest Loan and a Reducing Balance Loan

The differences between a fixed home loan interest rate EMI and a reducing balance EMI based on various parameters are as given below:

Interest rate

Housing loans with a fixed rate of interest will always have an affordable interest rate. If you check, housing loans with a decreasing balance will always have an expensive interest rate initially. Since the rate of interest decreases with time and amount, the initial rate is high. However, a home loan with a fixed rate always ensures that the initial rate of interest is low. When the loan balance is reduced, the rate of interest is also reduced.

Interest rate calculation

The interest rate calculation for a fixed housing loan is much simpler and easier. You have one fixed interest rate that you keep paying for the entire home loan tenure. The reducing balance of the housing loan makes it difficult to calculate your housing loan. When you opt for a fixed housing loan, the amount decreases and every month you get a new rate of interest and a different installment to pay. Therefore, for easy calculations, you can always choose a housing loan with a fixed EMI.

Amount on which interest is calculated

If you take out a fixed-rate loan, you will pay interest or EMIs based on the total loan sanction amount. Every month, you pay an EMI based on the housing loan sanction amount. However, for a reducing balance housing loan, it will be paid on the basis of the amount that is pending in the housing loan principal. The principal loan amount changes every time you make a payment. Therefore, the EMI will be based on the outstanding loan amount, which is different every month.

Manage finance

A fixed loan with a fixed rate and EMI is always better to make finances manageable. When you know your fixed EMI amount, it becomes easy to manage your EMI and other expenses monthly. However, with a reducing loan amount and rate of interest, you have a new EMI amount to pay every month. This can make it risky for your financial health.

Loan tenure

The loan tenure of a fixed-interest loan will usually be longer than that of a reducing balance loan. It is important to know this when you take a housing loan. The tenure of the loan will depend upon whether you are taking a fixed loan or a reduced balance loan.

Finishing up

Decide on the right home loan interest rate type. It is important to manage all the home loan documents required at the time of taking a home loan for a salaried individual.