Fixed vs. Floating Interest Rate: Which is Best for Your Home Loan?

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Confused between Fixed vs. Floating interest rate for your home loan? Our complete guide explains EBLR, MCLR, pros & cons to help you save lakhs. Read now!

Introduction: The Biggest Choice of Your Loan

 

Hello, and a very warm welcome to Fiknow!

You have done it. You have found your dream home. You have saved up your down payment. Now, you are at the bank manager’s desk to sign the loan papers.

This is the moment you have to make the biggest financial decision of your 20-year loan: The manager asks, “Sir, would you like a Fixed Rate or a Floating Rate?”

This one question can change your life. It can save you lakhs of rupees, or it can cost you lakhs. It can give you 20 years of peace, or 20 years of worry.

But what do these words even mean?

  • What is “fixed”?

  • What is “floating”?

  • What is this new “EBLR” word the bank is using?

  • Is the bank trying to trick me?

This is your complete, A-to-Z guide. We are here to be your financial friend. We will not use difficult bank words. We will explain everything, step-by-step, in simple language. We will tell you the honest truth.

This is a long, detailed guide. We want you to be an expert. By the end, you will be able to tell your bank manager exactly what you want, and why.

A Very Important Note (Disclaimer): We at fiknow.com are here to give you knowledge. This article is for information and education only. It is NOT financial advice. This is a 20-30 year decision. The interest rate market can change. Please think very carefully and read all bank documents before you sign.

Ready to make the smartest choice? Let’s begin.

Part 1: What is an Interest Rate? (The “Rent” on Money)

 

Before we talk about “Fixed” and “Floating,” let’s understand “Interest.” It’s simple.

Think of money as a “thing” you can rent.

  • You go to a bank to “rent” ₹50 Lakhs to buy your house.

  • The bank says, “Okay, you can rent our money. But you have to pay us a small ‘rent’ every month for using it.”

  • This “rent” is the Interest.

  • The “Principal” is the ₹50 Lakhs you borrowed.

  • The “EMI” is the monthly payment you make, which includes a small part of the Principal + the “rent” (Interest).

The only question is: How much is the rent? And that is where “Fixed” and “Floating” come in.

Part 2: What is a “Fixed” Interest Rate? (The “MRP” Path)

 

This is Option 1. It is the easiest to understand.

What it means: “Fixed” means “Locked.” The bank says, “Your interest rate is 9.5%. This rate is now ‘locked’ for the entire 20 years. It will never change.”

It is like buying a product with an MRP (Maximum Retail Price). The price is printed on the box. It doesn’t matter if it’s raining or sunny, the price is the price.

Example:

  • You take a ₹50 Lakh loan for 20 years at a Fixed Rate of 9.5%.

  • Your EMI is calculated at ₹46,607.

  • This EMI of ₹46,607 will be the exact same for the next 240 months.

  • If the RBI increases rates to 15%, your EMI does not change.

  • If the RBI cuts rates to 7%, your EMI does not change.

This sounds great, right? It sounds very safe. But, you must look at the good and the bad parts.

The Good Parts (Pros) of a Fixed Rate 👍

 

  1. 100% Peace of Mind (The Best Pro): This is the biggest benefit. You have zero stress. You know exactly how much money you have to pay every month for the next 20 years. You can plan your family’s budget perfectly.

  2. You are “Safe” from Rising Rates: If you think interest rates are very low right now and will only go up in the future, a fixed rate “locks in” that low rate. You will feel very smart if rates go up to 12% and you are still paying 9.5%.

  3. Easy to Understand: It is simple. No complex math. No EBLR, no MCLR. Just one number.

The Bad Parts (Cons) of a Fixed Rate 👎

 

  1. It is Always More Expensive (The #1 Con): A fixed rate is a “bet.” The bank is betting that rates will go up. You are betting they will stay low. To protect itself, the bank will always charge you a “premium.”

    • If the Floating Rate is 8.5% today…

    • …the bank will offer you a Fixed Rate at 10% or 11%.

    • You are paying 1.5% to 2.5% extra from Day 1, just for “peace of mind.”

  2. You Get “FOMO” (Fear of Missing Out): What happens if the RBI cuts interest rates?

    • All your friends (who took a floating rate) will see their EMIs go down.

    • You will be stuck paying 10% while everyone else is paying 7.5%.

    • You will feel “cheated” or “stuck.”

  3. High “Pre-payment Penalty” (The Big Trap): This is a big one.

    • What if you get a big bonus (e.g., ₹5 Lakhs) and you want to pay off a part of your loan early (this is called “pre-payment”)?

    • On a Fixed Rate loan, the bank will charge you a “penalty” or “fine.”

    • This is usually 2% to 3% of the amount you are pre-paying!

    • To pay ₹5 Lakhs, you might have to pay a ₹10,000 fine!

  4. “Reset Clause” (The Hidden Trick):

    • Some “Fixed” loans are not truly fixed.

    • Read the “fine print” (the loan agreement). Many banks have a “reset clause” that says…

    • “…the fixed rate is only fixed for the first 3 or 5 years. After that, it will automatically convert to the floating rate of that day.”

    • This is a “hybrid” loan, and it is often a trick to get you in at a high rate.

Part 3: What is a “Floating” Interest Rate? (The “Market” Path)

 

This is Option 2. This is what 99% of all home loan borrowers in India choose today.

What it means: “Floating” means “It changes.” The interest rate is not locked. It is “linked” to the market.

It is like the price of petrol or vegetables.

  • If the market price (set by the RBI) goes up, your interest rate also goes up.

  • If the market price goes down, your interest rate also goes down.

Example:

  • You take a ₹50 Lakh loan for 20 years.

  • The bank gives you a Floating Rate of 8.5% (which is much cheaper than the 10% fixed rate!).

  • Your starting EMI is ₹43,391.

  • Scenario 1: After 1 year, the RBI increases rates. Your rate goes up to 9.0%.

    • Your new EMI might become ₹44,986.

  • Scenario 2: After 3 years, the RBI cuts rates. Your rate drops to 8.0%.

    • Your EMI will go down to ₹41,822.

You have to “float” with the ups and downs of the country’s economy. This sounds scary, but it has huge benefits.

The Good Parts (Pros) of a Floating Rate 👍

 

  1. It is Always Cheaper to Start (The #1 Pro): The bank is not taking a big “bet.” They are sharing the risk with you. So, they give you their base rate.

    • A floating rate will always be 1% to 2% cheaper than a fixed rate on day one.

    • You start saving money from your very first EMI.

  2. You Benefit from Rate Cuts: When the economy is good and the RBI cuts interest rates, you get the benefit. Your EMI will go down, or your tenure will get shorter. You are not “stuck” like the fixed-rate person.

  3. ZERO Pre-payment Penalty (The RBI Rule): This is a Golden Rule from the RBI.

    • If you have a Floating Rate home loan, the bank is NOT ALLOWED to charge you any penalty for pre-payment.

    • You get a ₹5 Lakh bonus? You can pay it to the bank. Zero fees. Zero fine.

    • This gives you huge flexibility to finish your loan early and save lakhs in interest.

  4. It is 100% Transparent (Thanks to EBLR): This is the most important change. In the old days, banks used to cheat. They would increase floating rates fast, but lower them very slowly.

    • Now, the RBI has a new rule: EBLR (External Benchmark Linked Rate).

    • We will explain this in the next part. It is the reason why “Floating” is now the new king.

The Bad Parts (Cons) of a Floating Rate 👎

 

  1. No Peace of Mind (The #1 Con): This is the only real “con.” Your EMI is not fixed. It can change.

    • You have to check your loan statement every few months.

    • If the rate goes up, your EMI will go up. This can disturb your family’s monthly budget.

  2. The “Silent Tenure Killer” (The Hidden Trap): This is a very important trap to know.

    • Let’s say your rate goes up from 8.5% to 9.0%.

    • Your EMI should go up from ₹43,391 to ₹44,986.

    • But… the bank is smart. They don’t change your EMI. You are happy! You keep paying ₹43,391.

    • So what’s the catch? The bank has silently increased your Tenure.

    • Your 20-year loan has now become a 23-year loan.

    • You will be paying your EMI for 3 extra years! This is a “silent killer” that costs you lakhs.

    • Fiknow.com Advice: If the rate goes up, always call your bank and tell them, “Please increase my EMI. Do not increase my tenure.”

Part 4: EBLR – The “Game Changer” That Made Floating Rates Safe

 

This is the “expert” part, but we will make it simple. You must understand this.

The “Old Days” (Before 2019) – The “MCLR” Cheat

  • Banks used an “internal” system called MCLR or “Base Rate.”

  • “Internal” means the bank decided the rate itself.

  • The Cheat: When RBI increased rates by 0.50%, banks would increase your loan by 0.50% (very fast!).

  • When RBI cut rates by 0.50%, banks would… do nothing. Or they would cut your loan by only 0.10% (very slow!).

  • It was a one-way street. The bank always won. This was not transparent.

The “New Days” (After 2019) – The “EBLR” Honesty

  • The RBI got angry. They made a new, compulsory rule for all banks.

  • EBLR = External Benchmark Linked Rate.

  • “External” means the rate is outside the bank. The bank cannot control it.

  • What is this “External” rate? It is the RBI’s Repo Rate.

How your Floating Loan works today (EBLR): The bank gives you a “Loan Agreement” that is a simple math formula. It looks like this: Your Interest Rate = RBI Repo Rate + “Bank’s Credit Spread”

Let’s break it down:

  1. RBI Repo Rate (The “Vegetable Price”):

    • This is the “market price” set by the RBI. The bank cannot change it.

    • Let’s say today, the Repo Rate is 6.5%.

  2. Bank’s Credit Spread (The “Bank’s Profit”):

    • This is the bank’s profit margin. This is “fixed” for your 20-year loan.

    • Let’s say the bank sets your “spread” at 2.0%.

Your Interest Rate = 6.5% (Repo Rate) + 2.0% (Bank’s Profit) = 8.5%

Now, see the magic.

  • Scenario 1: The RBI increases the Repo Rate to 7.0%.

    • Your new rate is: 7.0% + 2.0% = 9.0% (It goes up instantly).

  • Scenario 2: The RBI cuts the Repo Rate to 6.0%.

    • Your new rate is: 6.0% + 2.0% = 8.0% (It goes down instantly).

This EBLR system is 100% transparent. The bank cannot cheat you. If the RBI cuts the rate, you will get the benefit.

This one rule is the single biggest reason why “Floating” is now the new, safe, and honest choice for almost everyone.

Part 5: The Math – Let’s See the Real Numbers

 

Let’s take a real loan and see which one is cheaper.

The Loan:

  • Principal: ₹50,00,000 (50 Lakhs)

  • Tenure: 20 Years (240 months)

The “What If” Scenarios:

  • Scenario A: You take a Fixed Rate at 10.5% (it’s always higher).

  • Scenario B: You take a Floating Rate that starts at 8.5%.

  • Scenario C: You take the 8.5% Floating Rate, but you are a “Smart Borrower” and you pre-pay a little.

Scenario A: The “Fixed Rate” Path (10.5%)

 

  • Your EMI is fixed at ₹49,919 per month.

  • You pay this for 240 months.

  • Total Paid: 240 x ₹49,919 = ₹1,19,80,560

  • Total Interest Paid: ₹1,19,80,560 (Total) – ₹50,00,000 (Loan) = ₹69,80,560

Scenario B: The “Floating Rate” Path (Avg. 8.5%)

 

  • Let’s assume the rate goes up and down, but the average for 20 years is 8.5%.

  • Your EMI is (on average) ₹43,391 per month.

  • Total Paid: 240 x ₹43,391 = ₹1,04,13,840

  • Total Interest Paid: ₹1,04,13,840 (Total) – ₹50,00,000 (Loan) = ₹54,13,840

The Result: (Fixed vs. Floating)

  • Fixed Rate Interest: ₹69.8 Lakhs

  • Floating Rate Interest: ₹54.1 Lakhs

  • You saved ₹15.7 Lakhs just by choosing a Floating Rate!

Scenario C: The “Smart Borrower” Path (Floating + Pre-payment)

 

  • You take the 8.5% Floating Rate (EMI = ₹43,391).

  • Your Plan: You get a ₹1 Lakh bonus from your job once every year. You use this ₹1 Lakh to pre-pay your loan.

  • The Result:

    • Your 20-year (240 month) loan will be 100% finished in just 12 years (144 months)!

    • You will be debt-free 8 years early!

    • Total Interest Paid: ₹28.4 Lakhs.

Let’s Compare All Three:

  • Fixed: You paid ₹69.8 Lakhs in interest.

  • Floating: You paid ₹54.1 Lakhs in interest.

  • Smart Floating: You paid ₹28.4 Lakhs in interest.

This is the power of a Floating Rate + Pre-payment. You save ₹41 Lakhs compared to the “safe” fixed rate.

Part 6: So… Which One is Best for YOU? (The Final Verdict)

 

This guide has all the information. Now you must make a choice.

You should choose a FLOATING RATE if… (99% of People)

 

  • ✅ You are a salaried person with a growing income.

  • ✅ You want the cheapest interest rate from Day 1.

  • ✅ You understand that your EMI might go up or down a little (you are not scared).

  • ✅ You want the freedom to pre-pay your loan (with your bonus) and pay ZERO penalties.

  • ✅ You trust the new, transparent EBLR system.

You might choose a FIXED RATE if… (A very small group)

 

  • ✅ You are extremely afraid of risk. You want “peace of mind” more than anything.

  • ✅ You are willing to pay 1.5% to 2.5% extra for this peace of mind.

  • ✅ Your income is 100% “fixed” (e.g., you are a pensioner) and you cannot afford any change in your EMI.

  • ✅ You are 100% sure that interest rates are at their lowest possible point and will only go up for the next 20 years. (This is a very, very hard bet to win).

The Fiknow.com Final Verdict: For 99% of home loan borrowers in India, a FLOATING RATE (EBLR) loan is the clear winner. It is cheaper, it is 100% transparent, and it gives you the (zero-penalty) freedom to pre-pay your loan and become debt-free faster.

Part 7: Can I “Switch” My Loan? (The “Reset Button”)

 

What if you made a mistake?

  • Case 1: You took a Fixed Rate at 11% and now Floating Rates are 8.5%. You feel stuck.

  • Case 2: You have an old, “cheater” MCLR Floating loan. Your bank is not cutting your rate.

You are NOT stuck. You have a powerful option called a “Home Loan Balance Transfer.”

What it is:

  • You go to a new bank (e.g., PNB).

  • PNB says, “We will give you a new EBLR loan at 8.5%.”

  • PNB pays the full outstanding amount (e.g., ₹40 Lakhs) to your old bank (HDFC).

  • Your HDFC loan is now “Closed.”

  • You now have a new home loan with PNB at the cheaper 8.5% rate.

This is a fantastic way to “reset” your loan.

  • The Cost: You will have to pay a small Processing Fee (e.g., ₹10,000) to the new bank.

  • The Benefit: You will save lakhs in interest.

Conclusion: The Choice is Yours

 

You are now an expert. You know that:

  • Fixed = “MRP.” It is safe, but it is expensive and has penalties.

  • Floating = “Market Price.” It can change, but it is cheaper, transparent (thanks to EBLR), and has ZERO pre-payment penalties.

You also know the “EMI See-Saw” secret.

  • Internal Link: The EMI (Equated Monthly Instalment) is your key. To understand exactly how this number is made and how pre-payments save you so much, you must read our https://fiknow.com/how-to-calculate-emi/.

  • By choosing a Floating Rate, you get the power to pre-pay.

  • By pre-paying, you attack the “Principal” and save lakhs in interest.

The choice is clear. Don’t pay extra for “peace of mind.” Choose the transparent, flexible, and cheaper path. Choose the Floating Rate.

Frequently Asked Questions (FAQ) Section

 

Q1: What is EBLR? A: EBLR stands for External Benchmark Linked Rate. It is the new, honest way to calculate a floating interest rate. Your loan is linked to an “external” rate (like the RBI’s Repo Rate) that the bank cannot control. It is 100% transparent.

Q2: What is MCLR? A: MCLR was the old (pre-2019) way of calculating floating rates. It was “internal” (the bank decided it). Banks were slow to pass on rate cuts, so the RBI banned it for new loans. If you have an old MCLR loan, you should switch to an EBLR loan.

Q3: Can my bank force me to take a fixed rate? A: No. The bank must offer you both choices and explain the difference. If a bank only offers a fixed rate, it is a “red flag.” Go to another bank.

Q4: What if my EMI goes up on a floating loan? A: This is a real risk. If the rate goes from 8.5% to 9.0%, your bank will usually increase your tenure (e.g., from 20 to 21 years) but keep the EMI the same. You must call them and say, “I want to increase my EMI” to keep your original 20-year plan.

Q5: What is a “hybrid” loan? A: This is a “trick” loan. It is “Fixed” for the first 3 or 5 years and then automatically converts to a Floating Rate. It is usually not a good deal, as the “fixed” part is very expensive.

Q6: I am a woman borrower. Do I get a special rate? A: Yes! Almost all banks in India (like SBI) offer a 0.05% discount on the interest rate if a woman is the primary applicant or co-applicant on the home loan. It’s a small but important benefit.

External Links (For Your Own Research)

 

We want you to be 100% informed. Here are the official RBI and bank websites.

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