What is the difference between fixed and floating interest rates?
With fixed interest rates, the mortgage interest rate is static and cannot change for the duration of the mortgage agreement. With floating or variable interests rates, the mortgage interest rates can change periodically with the market.
Fixed versus floating interest rate
Fixed rates are slightly higher than floating rates. Floating rates are slightly lower than fixed rates. If you are comfortable with the prevailing interest rates, are reasonably sure that interest rates will rise in future, opt for a fixed rate home loan.
You may have to pay more than you can afford: It is impossible to have a fixed monthly repayment schedule on floating interest rates. There may be times when the EMI amount may exceed the amount you expected or are comfortable paying. This can affect your monthly savings as well.
The fixed home loan interest rate that's most closely correlated to the OCR is the 6-month rate – and yet, even that is consistently at least 1% lower than the floating home loan rate. The reason for this is because banks seek to extract a much higher margin on floating rates to support their profitability.
Banks offer floating-rate loans at lower cost because these loans help them match the interest-rate exposure of their own short-term liabilities.
A fixed interest rate on a mortgage, loan, or line of credit makes it easier to calculate the lifetime cost of borrowing because the rate doesn't change. This allows you to budget for other expenses, including any extras like vacations or a new car. It also gives you the opportunity to plan for any savings.
As such, floating rate and adjustable rate loans are at greater risk in a rising rate environment as not only is debt service coverage decreasing due to higher rates, but credit risk often increases.
It is possible to shift from floating to fixed interest rates and vice-versa. However, when switching, remember that you may be levied a charge. This conversion fee may be up to 2% of the loan amount. Choosing between a floating and fixed interest rate is an important decision as it affects your EMI.
Less flexibility: Fixed rate loans may limit a borrower's ability to pay off their loan faster by restricting additional repayments or capping them at a certain amount a year. Significant break fees can apply if you want to refinance, sell your property or pay off your loan in full before the fixed term has ended.
“On the other hand, with a floating mortgage you can make any number of extra repayments penalty-free.”
Should I get a floating-rate mortgage?
The Bottom Line
Floating interest rate mortgages can be an excellent choice if you want to take advantage of lower rates for a short period before the rates become unpredictable, but it's important you understand how they work as they can be complicated loans.
If you're in the market for a mortgage refinance, the current average 30-year refinance interest rate is 6.88%, down 14 basis points over the last week. Mortgage rates have shifted around but remain elevated. In 2024, experts were predicting the 30-year mortgage to slowly shift down, eventually landing under 6 percent.
A rise in interest rates automatically boosts a bank's earnings. It increases the amount of money that the bank earns by lending out its cash on hand at short-term interest rates.
All sorts of loans and debt instruments carry floating interest rates. But they tend to be especially common with credit cards and mortgages. Floating interest rates may be adjusted quarterly, semiannually, or annually.
Floating Interest Rates Personal Loan typically mean that the interest rate can change during the loan tenure due to types of lending rates. If you opt for a Personal Loan with a floating interest rate, then you must be prepared for any change in the interest rate during the loan tenure.
Options for when your fixed rate ends
A variable rate means your repayments will change (go up and down) in line with the standard variable rate. If this is what you're after, you don't need to do anything – it'll automatically happen once your fixed term is finished.
Interest rates have held steady since July 2023.
The Fed raised the rate 11 times between March 2022 and July 2023 to combat ongoing inflation. After its December 2023 meeting, the Federal Open Market Committee (FOMC) predicted making three quarter-point cuts by the end of 2024 to lower the federal funds rate to 4.6%.
The interest rate on the money we borrow is known as the 'cost of funds'. If you make additional repayments, or pay out your fixed rate loan early, the original loan term remains the same. Accordingly, an economic cost is charged to us and this is why we pass this cost on to you.
When it comes to investing, compound interest is better since it allows funds to grow at a faster rate than they would in an account with a simple interest rate. Compound interest comes into play when you're calculating the annual percentage yield. That's the annual rate of return or the annual cost of borrowing money.
Floating a rate can be a good idea if rates have been falling recently, but it's also a little risky. Even the most experienced financial experts have trouble predicting whether rates will rise or fall, so there is no guarantee you won't end up with a higher rate than when you applied for your loan.
Which rate of interest is better?
Generally speaking, if interest rates are relatively low, but are about to increase, then it will be better to lock in your loan at that fixed rate. Depending on the terms of your agreement, your interest rate on the new loan will stay the same, even if interest rates climb to higher levels.
Floating rate funds appeal to investors when interest rates are rising since the fund will yield a higher level of interest or coupon payments. Floating rate funds are an attractive investment for the fixed income or conservative portion of any portfolio.
Yes. Banks generally can make changes to a fixed rate, but there are limits to the changes banks can make and certain notice requirements. For credit card accounts, the term "fixed rate" usually is used to distinguish the rate from a variable rate, which is based on an index.
A floating interest rate changes periodically, as opposed to a fixed (or unchanging) interest rate. Floating rates are used by credit card companies and commonly seen with mortgages. Floating rates reflect the market, follow an index, or track another benchmark interest rate.
Mortgage rates are currently expected to continue trending down through 2024 and into 2025. The Mortgage Bankers Association thinks that 30-year mortgage rates could fall to 5.6% in 2025.
