Fixed Vs Floating Interest Rate on Home Loans

home loan

When it comes to property purchases, people usually spend much of their time considering the most suitable interest rate. This interest rate would depend on the principal loan amount and the loan period. Moreover, deciding between fixed or floating mortgages makes it even more difficult for homebuyers to choose their preferred options. Essentially, in every loan, the fixed and floating interest rate interest rate plays a key role, and this is a fact that cannot be ignored.

Banks and non-banking finance companies provide home loans at fixed or floating interest rates. One should understand the initial contrasts between these two loan kinds. However, to do this, one should compare fixed vs floating interest rate and consider them both.

What is a Floating Interest Rate?

Floating interest means that the interest is revised once every three months, and so on. The RBI sets its benchmark rate based on different economic indicators, and your loan's interest rate will be associated with that rate. Therefore, changes in the benchmark rate will be reflected by changes in the loan's interest rate.

Any change in the interest rates during the loan may not affect the EMI. Instead, the tenure on the variable interest loan will adjust. The RBI rules prohibit prepayment penalties for floating-rate loans.

Benefits of Floating Interest Rate

  • One of its key advantages is the usually smaller variable interest rate on home loans than the fixed interest rate. For example, if a fixed rate of 12% is given and yet they offer you a margin rate of 10.5%, then even with an increase in variable interest rates by as much as 2.5 percentage points, you would still have saved some money.
  • However, if there is an interruption, your variable interest rate will spike briefly. This will not cover the period of the whole loan life.
  • Loan payback terms are shorter. Therefore, it is an excellent choice for individuals planning to take out further loans later.

What do You Mean by Fixed Interest Rate?

A fixed interest rate suggests that the loan rate will remain constant throughout the duration of the loan. Fixed interest rates often cost 1% to 2% more than the current floating interest rates. You feel more secure with fixed-interest loans since you are aware of the monthly payments and loan terms in advance. However, bear in mind that, depending on your lender's conditions, fixed rates on long-term loans, like mortgage loans, move to variable interest after a few years. It is known as a reset.

Benefits of Fixed Interest Rate

  • The interest rate is unaffected by changes in the market. This provides the best defence, particularly in turbulent situations.
  • For people who are adept with money management, fixed home loan interest rates are optimal. Additionally, it provides the best choice for long-term budgeting.
  • In terms of stability and certainty, it also aids long-term planning.

Difference Between Floating Interest Rate and Fixed Interest Rate

Here is a comparison of fixed and floating interest rate with some key points:

Point Floating Interest Rate Fixed Interest Rate
1. Definition Interest rate that can change periodically based on market conditions and a reference rate (e.g., LIBOR or Prime Rate). Interest rate that remains constant throughout the loan or investment term.
2. Rate Adjustment Adjusts periodically, often in sync with market interest rate fluctuations. Remains constant for the entire duration of the loan or investment.
3. Risk More volatile and exposes borrowers to interest rate fluctuations. Offers rate stability, reducing the risk associated with changing rates.
4. Market Dependency Depends on market forces and economic conditions. Independent of market conditions; set at the time of agreement.
5. Predictability Less predictable, making it challenging to budget for future payments. Highly predictable, making budgeting more straightforward.
6. Initial Cost Typically lower initially than fixed rates, making it more affordable at the outset. Often higher initially but remains fixed, providing long-term cost certainty.
7. Suitable for Borrowers/investors who can tolerate interest rate risk or those expecting rates to decrease. Borrowers/investors seeking rate stability and predictable payments.

Which is the Best Option for You?

You must choose which interest rate is in your best interest between fixed and floating interest rate. Ideally, you should evaluate different aspects of home loans and comprehend every single element. A fixed-rate home loan will be the most significant choice if security and predictability are your top priorities, but it won't come without a premium on interest rates. It is one of the greatest possibilities on the market because several institutions provide low rates for home loans.


To sum up, your unique financial situation, risk tolerance, and perspective on interest rates will ultimately determine whether you choose a fixed rate vs floating rate. See a financial counsellor or mortgage broker to weigh your alternatives and choose the loan that best suits your circumstances.

Depending on whether stability or flexibility is more important to you, you can choose between the difference between fixed and floating interest rate. While floating rates allow for future fluctuations depending on market conditions, fixed rates offer predictable repayments. The optimal course of action for you will depend on your financial objectives and the advice of a specialist.

Frequently Asked Questions Expand All

Indeed, such a switch can be made. Lenders typically impose a modest conversion fee, usually around 2% of the loan amount.

The availability of fixed rate vs floating rate depends on the specific NBFC lender.

When dealing with individuals aged 40 or older, evaluating the potential frequency of interest rate fluctuations over several decades is best. If the probability of interest rates undergoing significant changes is minimal, opting for a fixed interest rate for a home loan is the wiser choice.

Certainly, personal loans offer the flexibility of choosing either a fixed rate vs floating rate.

Indeed, vehicle loans can come with a fixed rate vs floating rate, though the availability of these options may vary depending on the lender.