When a bank offers you a home loan, the first choice is between a fixed and a floating interest rate. The difference comes down to who carries the risk of rates changing over the next 15 to 30 years.
What is a floating rate?
A floating rate moves with an outside benchmark. For most new home loans in India that benchmark is the RBI repo rate. When the repo rate falls, your rate can fall. When it rises, your rate can rise. The bank adds a fixed margin on top of the benchmark, called the spread, and that spread stays the same unless you renegotiate it.
Floating loans are the norm. Almost every large bank and housing finance company sells them as the default product.
What is a fixed rate?
A fixed rate stays the same for the period you agree. Many lenders fix it only for the first few years, after which the loan becomes floating. Fixed rates are usually priced higher than floating ones, because the bank takes on the risk of rates moving against it. Fixed loans can also carry a charge if you close them early, while floating loans taken by individuals cannot.
Side by side
- EMI predictability: fixed is steady, floating can change.
- Starting rate: floating is usually lower.
- Benefit when rates fall: only floating.
- Protection when rates rise: only fixed.
- Prepayment: free on floating loans for individuals, may be charged on fixed.
A worked example
You borrow 50 lakh for 20 years. A floating offer is 8.5% and a fixed offer is 9.5%.
- At 8.5% the EMI is about 43,391 and the total interest is about 54.14 lakh.
- At 9.5% the EMI is about 46,607 and the total interest is about 61.86 lakh.
The fixed loan costs you about 3,200 more every month and about 7.7 lakh more over the life of the loan. That extra is what you pay for a steady EMI.
Now suppose rates rise by one percentage point after a few years and your floating rate becomes 9.5%. Your EMI would move to the same level as the fixed loan. If rates instead fall by one point to 7.5%, your EMI drops to about 40,280, a saving of about 3,100 a month against today. Floating wins when rates are flat or falling, and fixed wins only if rates rise sharply and stay high.
How to decide
- Check your budget. If an EMI increase of 10 to 15% would hurt, a fixed rate or a bigger savings buffer is worth the cost.
- Look at the gap. If the fixed rate is more than about one percentage point above floating, the extra cost is hard to recover.
- Think about your horizon. If you expect to prepay heavily or move the loan in a few years, floating is cheaper and carries no exit penalty.
- Read the fixed period. A "fixed" loan that turns floating after three years is only partly fixed.
You can switch
Since a 2023 RBI circular, lenders must offer borrowers on floating loans a way to move to a fixed rate when the rate is reset, and must tell you the charges for doing so. Our guide on getting a lower floating rate covers the steps.
The short answer
If you are salaried and can handle some change in EMI, floating usually costs less and is easier to exit. Pick fixed only if a rate rise would put real strain on your budget, and compare the actual numbers before you sign. You can test both rates side by side with the compare panel in the calculator, and see today's rates from different banks on our interest rates page.