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

Experience the all-new Kotak Netbanking
Simpler, smarter & more intuitive than ever before
Experience the all-new Kotak Netbanking Lite
Simpler, smarter & more intuitive than ever before. Now accessible on your mobile phone!
Customers prefer fixed interest rates when:
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.
Load More
Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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
Disadvantages of Fixed Interest Rate
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:
Disadvantages of Floating Interest Rate
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?
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.
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.
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.
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?
When Should You Consider Switching?
You have already rated this article
OK