Fixed Vs Floating Home Loan Interest Rate

04 JUNE, 2025

Since applying for a Home Loan has become more straightforward than it was in the past decade, more people are able to fulfil their dream of owning a house. To encourage this trend, financial institutions are crafting Home Loan plans with attractive interest rates making them suitable for individuals and co-borrowers alike. Although eligible individuals can obtain a Home Loan quickly, the choice between the type of interest on Home Loan often leads to borrowers wondering whether to choose fixed or floating Home Loan.

There are two types of interest rate in banks, namely fixed and floating interest rate. Read on to understand the difference between the two Home Loan rate types.

What is Fixed Interest Rate?

As the name suggests, a fixed interest rate on Home Loans means the interest rate is the same throughout and you pay a fixed amount of money as instalments over the full tenure of your Home Loan. The number of instalments remains the same over the decided time period. This rate is not affected by market fluctuations.

Advantages of Fixed Interest Rate

As the rate is fixed, monthly EMIs are the same. So, you can plan your finances with certainty.
You’re isolated from sudden increases in interest rates driven by rising repo rates or inflation.
Locking a low fixed interest rate in a favourable economic phase gives you the dual benefit of saving more and not worrying about market fluctuations as well.
It is good for salaried individuals with a fixed monthly income.
It makes long-term financial planning easier as there are no surprises.

Disadvantages of Fixed Interest Rate

It is usually 1 – 2% higher than floating rates when your loan is disbursed.
You can't take advantage of interest rate cuts until you refinance or switch to floating.
Most of the banks impose prepayment on fixed-rate Home Loan
If the market rates drop, you continue to pay the higher agreed rate.
Some banks impose long lock-in periods during which you cannot switch to floating or refinance easily.

What is a Floating Interest Rate?

A floating interest rate fluctuates over the loan tenure based on changes in a benchmark rate (such as the RBI's repo rate). It means that your EMI will increase or decrease with the change in interest rates. It is typically lower than fixed interest rates at the time of loan disbursal.

Between the two Home Loan interest rate types, floating interest rates are rapidly gaining popularity among homebuyers and as a result Home Loan lenders like banks are offering Home Loan interest rates at attractive floating rates.

Nowadays, Home Loan borrowers take the help of Home Loan EMI calculator to estimate the monthly instalments of their loan. Lastly, the Marginal Cost of Funds based Lending Rate (MCLR) influence the base rates of loan lending organizations. MCLR is a minimum lending interest rate of the bank below which they will not lend money to potential borrowers. Borrowers can compare the two Home Loan interest rate types and use them to their advantage.

Advantages of Floating Interest Rate

Let’s understand some benefits of Floating Interest Rate:

Floating interest rates are usually 0.5% to 2% lower than fixed rates when your loan is disbursed.
If the RBI reduces interest rates, your loan EMIs also reduce. (For Example: RBI recently cut the repo rate to 6% from 6.25%)
Most banks don’t charge prepayment fees on floating-rate Home Loans.
If rates remain low, you can end up paying significantly less interest over the tenure.
It is easier to refinance or switch banks if better rates are available.

Disadvantages of Floating Interest Rate

The monthly payments fluctuate, which makes budgeting more difficult.
There is a downside if interest rates rise according to the market and your EMI burden increases.
If the increase happens frequently, it will increase your total interest paid over the loan tenure, making the loan costlier than expected.
You have to keep on changing your long-term goals due to uncertain EMIs.
Your repayment plan depends on factors like inflation, government policies, and global economic conditions.

Read a Similar Article: How Repo Rates Impact Your Home Loan Interest Rates?

Differences Of Fixed Vs Floating Interest Rate

In fixed interest rate Home Loan, the interest rate remains the same whereas the floating rates keep on changing. The unpredictability of floating rates does not work in everyone’s favour and it’s one of the reasons why many borrowers prefer fixed interest rate Home Loan. The market conditions do not affect it. Fixed interest rate Home Loan might sound like a good option, but it is higher. Whether you choose fixed or floating Home Loan, it is important to know the key differences between them. When fixed and floating interest rate are compared, they both have their pros and cons:

Difference between fixed and floating interest rate:

Feature	Fixed Interest Rate	Floating Interest Rate
Rate Type	Constant throughout tenure	Changes with market rates
EMI Amount	Same every month	Varies as rates change
Market Dependency	Not affected by market fluctuations	Directly affected by repo rate change by RBI
Initial Rate	Usually higher than floating rate	Usually lower than fixed rate
Rate Drop Benefit	No	Yes
Prepayment Charges	Yes	None
Budgeting Ease	High	Moderate

Now that you know the two Home Loan rate types, you can take an informed decision.

Why are Floating Interest Rates Better?

Lower interest rates

Floating rates are usually slightly lower than fixed interest rates. Lenders charge more for fixed interest rates to cover their interest risk for the entire tenure. While it depends on the lender, the difference can be between 250-400 bps. Therefore, while you might think that the fixed interest rate would be cheaper due to its fixed nature, the total interest outgo can be much higher in the longer run.

No prepayment charges

As per Reserve Bank of India's mandate, lenders cannot charge a prepayment fee on floating interest rate Home Loans. Therefore, if you plan to prepay your Home Loan, you will not need to pay any foreclosure charges. Usually, the prepayment charges are 2% of the outstanding loan amount.

More choices

Lately, very few lenders offer fixed interest rate Home Loans. Therefore, you have limited choices in fixed interest rate Home Loans. While a few lenders offer hybrid loans where fixed interest rates change in floating after a few years, it is not usually recommended.

Transparent

Floating interest rates have more transparency and flexibility. They are cost-effective and provide you flexibility in benefiting from competitive pricing structures. It also helps you easily opt for a Home Loan balance transfer.

Though floating interest rates are uncertain and keep changing throughout the tenure, they are usually cheaper and cost-effective. Therefore, you must research both Home Loan interest types before you apply for Home Loan. If you are confused, it would be best to consult a financial advisor and then decide.

Who Should Opt for Fixed vs Floating Home Loans?

Now, after analysing all the aspects of fixed and floating interest rates, you got a clear idea of which works for you. We have listed a comprehensive chart for you to understand the same:

Borrower Type	Recommended Interest Type	Reason
First-time Homebuyers	Fixed Interest Rate	If you are buying a property for the first time, fixed rates are good as it is easier to plan EMIs and predictable.
Real Estate Investors	Floating Interest Rate	If you are an investor, you can take advantage of rate cuts and prepay without penalty.
Salaried Individuals	Fixed Interest Rate	Salaried individuals prefer fixed rates as they have fixed monthly incomes, and it reduces the risk of surprises.
Self-employed Professionals	Floating Interest Rate	People in business can opt for floating rates as they will benefit from rate fluctuations and allow flexibility.

Switching Between Fixed and Floating Rates: Is It Possible?

Yes, most banks and housing finance institutions in India give an option to their borrowers to switch between different interest rates during the tenure of their Home Loan. However, there are certain terms and associated charges. Take a look at the switch fees at Kotak Mahindra Bank.

How the Switching Process Works?

You must submit a formal request to your bank to initiate the switch.
The bank will evaluate your repayment history and loan eligibility before approving.
You need to sign a revised loan agreement to reflect the new rate structure.

When Should You Consider Switching?

It is a good idea to switch to floating interest rates if the market rates have dropped significantly.
If you’re on a high floating rate and expect future rate hikes. In this case, you must start thinking about switching to fixed interest rates.
When you have a considerable tenure like 5+ years remaining, the interest amount saved justifies the switching fee.

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Frequently Asked Questions

Which is better fixed or floating interest rates?

There is no one-size-fits-all answer. Fixed rates have predictable EMIs and are good for those who value stability. Floating rates fluctuate with market trends and are good in a declining interest rate environment. It’s best to analyse your financial goals and consult with an advisor before deciding.

Can I change floating interest to fixed interest?

Yes, most banks have the option to switch from a floating to a fixed interest rate (and vice versa) during the loan tenure. However, there are associated charges involved when you apply for the switch.

When do customers prefer fixed Home Loan interest rates?

Customers prefer fixed interest rates when:

They want stable EMIs for easier budgeting.
They are first-time homebuyers and want predictable EMIs.
They have long-term financial commitments and don’t want to play with market fluctuations.

Do floating Home Loans allow prepayment and are there prepayment penalties?

Yes, banks allow prepayment of floating Home Loans. Floating Home Loans don’t attract any prepayment penalties. This makes it easier to reduce your interest burden or close the loan earlier if you have surplus funds without any extra charges.

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Choosing Between Fixed and Floating Home Loan Interest Rates: What's Best for You?