Floating & Fixed Rate of Interest: What’s the Difference?

There’s no doubt that taking a home loan itself is one of the biggest decisions taken by people but it’s equally important to choose a home loan product carefully that offers you the best possible interest rate. Once you do decide on the product, you’ll have to choose what kind of interest to go for: floating or fixed. Let’s understand in detail how each is different.

What do you mean by Fixed Interest Rate? 

A loan at a fixed interest rate requires the borrower to repay the loan in fixed and equal EMIs (Equated monthly installment) through the tenure agreed upon with the lender. In this case, the amount to be repaid is constant and not influenced by the financial market conditions. So, it’s advisable to keep a track of financial trends to understand if the current market offers the best interest rates. If that’s the case or if the forecasts predict a spike in interest rates in the near future, going for a fixed interest rate will be a safe choice.   

And what is Floating Interest Rate? 

In this scenario, the interest rate fluctuates as per the ups and downs in the financial market. The interest rate is determined by the base rate the lender offers, meaning if there is a variation in base rate, the interest rate automatically gets revised, impacting your EMI amount.

However, it’s interesting to note that overall floating rates are cheaper than fixed interest rates. On a general note, fixed interest rates are 1-2.5% higher than floating rates. The fluctuation in rates may make it difficult to plan finances in advances, but these ups and downs are temporary and lenders (banks and NBFC) these days offer home loans at competitive (floating) interest rates.

Difference between Fixed and Floating Interest Rates 
Fixed Interest Floating Interest 
Is fixed and not affected by market conditions Undergoes changes according to market conditions 
Higher Flexible, often cumulatively lower 
Fixed EMI amount EMI flexible as per interest rate or MCLR by RBI 
Easier to pre-plan finances Unpredictable and difficult to plan finances beforehand 
Lower Risk with fixed amount Higher Risk but likely to generate more savings 
Ideal for short-term (up to 10 yrs) Ideal for long-term (10-30 yrs) 

The fixed interest rate might be the best option for people nearing retirement as they would prefer to plan their expense, generally have enough savings with a comfortable income and would like to avoid risks. People in their 20s or people who have numerous years left in the workforce prefer the floating interest rate as they can afford to take the risk, have enough time to pay off the loan and get the chance to enjoy a dip in interest rate numerous times through their loan tenure.    

To give you a better understanding, let’s also take a quick look at the interest rates at which leading lenders currently offer home loans on Fincity.  

Note: The rates below are subject to change at the lender’s discretion or as per RBI directives. 

Converting from Fixed to Floating Interest Rates & Vice Versa

It is possible to shift from fixed to floating interest rate and vice versa. When you choose to, the lender will charge you a conversion fee of up to 2%. 

It is also possible to prepay the loan amount before the tenure ends. In this case too you’ll be charged a nominal penalty fee of 2-2.5% of the outstanding principal amount.  

Before you focus on your home loan options, know your eligibility with Fincity Loan Eligibility Calculator. You can then compare home loan offerings by 50+ lenders and even know the EMI you’d have to pay each month with our EMI Calculator.

Get started