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Fixed and Floating Rate Home Loans: Which Option is Right for You?

By IIFL Home Loans | Published On Jun 02 2023 7:21 AM 1 min read 496 views 905 Likes
Fixed Interest Rate vs. Floating Interest Rate Home Loans

Buying a home is a dream that we all wish to fulfil. Getting a home loan is one of the easiest ways to finance that dream. Even though it's a long-term commitment, affordable equated monthly instalments (EMIs) make it easier to own a home. The interest rate of a home loan is one of the most important factors to consider when looking for a home loan.

With the interest on a home loan, you have two options to choose from: a fixed interest rate and a floating interest rate. Let's learn more about these options so you can decide which suits your needs the best.


Floating Rate vs. Fixed Rate

Interest rates are an important component for a borrower, as the right option can help avoid financial stress and lower the overall loan repayment amount. A fixed interest rate on a loan would mean that the EMIs would be fixed over the tenure of the loan, whereas in case of floating interest rate on a loan, the EMIs would fluctuate as per the changes in the interest rate.

What is a Fixed Interest Rate?

A fixed interest rate is decided at the time of the sanctioning of the loan. Due to fixed rates, the EMIs are fixed which helps you in budgeting and paying an equal amount every month. It brings you clarity when it comes to loan repayment. The mortgage fixed rate doesn't change based on the changes in inflation rates.

Time-bound Fixed Rates

Time-bound fixed rate is a fixed floating rate, where loan interest rates are fixed for a specific time and it auto-converts to floating interest rates.

Advantages of Fixed Rates

  • If you have a constant and tight budget, paying the monthly instalments is easier as the EMI amount is fixed.

  • Fixed interest rates remain unchanged despite changes in RBI Repo Rates.

  • Unchanged interest rates provide stability and surety during loan repayment.

  • The tenure of the home loan does not change due to fixed interest rates.

Disadvantages of Fixed Rates

  • Fixed interest rates may be a bit higher than floating interest rates.

  • You can't take advantage of a falling repo rate because the fixed rate doesn't change.

  • The fixed rate only lasts a specific duration of time, after which you may have to negotiate with your lender for another fixed rate.

What is a Floating Interest Rate?


Floating rates are subject to change

Also referred to as an adjustable rate or a variable rate, a floating interest rate means a rate that changes according to the changes in relevant economic rates. This means that the rate of interest will vary during the loan tenure and the EMIs would also fluctuate likewise. Factors like the rate of inflation, monetary policies or a change in RBI's Repo Rate, affect the rate of interest that will be applicable at a specific time.

Floating home loan interest rates are adjusted on a periodic (quarterly, half-yearly or annually) basis depending upon the terms and conditions of the loan.  

Advantages of Floating Rates

  • Interest rates get adjusted periodically based on the nature of a loan.

  • Incentives or festive bonuses can be used for the prepayment of a loan without any penalty.

  • As it is linked with the repo rates, they enjoy the benefits of the interest rate cycle.

  • Floating interest rates may be slightly cheaper than fixed interest rates.

Disadvantages of Floating Rates

  • A floating home loan interest rate is unpredictable, as it keeps on changing based on the interest rate cycle. 

  • It may become inconvenient if you have a lesser risk appetite and lesser knowledge regarding the market change.

  • You can end up paying higher interest during unfavourable market conditions.  

  • It's difficult for planning a budget as the EMI keeps on changing irrespective of interest rate changes.

Factors to Consider While Deciding Between Fixed and Floating Rates


Choosing the right rate can help you save in the long run

Your Income:

People who follow budgeting and are willing to pay a fixed percentage of the premium of their income can opt for a fixed interest rate, which can lead to higher interest payments irrespective of floating interest rates.

Your Age:

Borrowers who are in their 40s or more might benefit more from fixed rather than floating rates as they may have more priorities, want to be secured and may not be too excited about any surprises. Whereas a floating rate may be more suitable for younger borrowers in their 20s. They tend to have a greater risk appetite and may adapt to the changes better as they may have fewer priorities.

A Quick Comparison: Floating Rate vs. Fixed Rate


Fixed rate

Floating rate


It remains fixed throughout the loan

It keeps on changing as per the benchmark rate (repo rate)

Interest rates

Comparatively higher

Comparatively lower

Prepayment option

A Prepayment penalty will be charged

No prepayment penalty

When to choose

When the repo rate is going to increase

When the repo rate is going to fall

Term of loan

It doesn't change

It changes

Ease of budgeting

It becomes easy as you have to pay a fixed EMI

It becomes hard as the EMI keeps on changing due to interest rates

Summing Up

By weighing the advantages, disadvantages, and key factors associated with fixed and floating interest rates, you can make a more informed decision about your home loan. Remember, there is no one-size-fits-all solution. By analysing your financial situation and considering the factors outlined in this blog post, you'll be better equipped to determine whether a fixed or floating rate of interest is the right path for you.

At IIFL Home Loans, we aim to help you make decisions that are the best for you. We strive to bring affordable housing options to you so you can be equipped to own the home of your dreams. Apply online now with IIFL Home Loans, and take a step closer to your dream home.


1. What are fixed interest rates?

Fixed interest rates are the rates that are fixed and do not change due to interest rate (Repo rate). 

2. What are floating interest rates?

Floating interest rates are the rates that float, which means they keep on changing due to interest rates (Repo rates).

3. What is the difference between fixed and floating home loan interest rates?

In the Floating rate, interest rates, EMIs and loan tenure keep on changing based on the economic conditions.

4. Is there any prepayment penalty on floating interest rates?

As there is no prepayment penalty on floating interest rates. But if you have to prepay on a fixed rate you have to pay a prepayment penalty. 

5. Which option is best for the current market situation?

As per the current market trend, it's believed that repo rates (interest rates) are going to fall for 2-3 years, meaning floating rates will be beneficial.


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