Fixed vs Floating Home Loan Rates: Which Should You Choose?

Most comparisons of fixed vs floating home loan rates stop at "fixed is predictable, floating is cheaper but risky." That's true as far as it goes, but it skips two things worth knowing before you sign anything: what "fixed" actually means in India, and what mechanically happens to your loan the day a floating rate resets.

Does "fixed" really mean fixed for the full tenure?

Fixed rates also tend to be priced meaningfully higher than floating from day one, since the lender is pricing in the interest-rate risk it's taking on instead of you. On the site's own base case (₹1,00,00,000, 20 years), the gap alone is a real number:

That's a ₹30,36,912 difference in total interest for a 200-basis-point gap, on this loan size and tenure. It doesn't mean floating always wins, a fixed rate is still a real hedge against rates rising, but it's the size of the premium you'd be paying for that certainty, computed on this site's own numbers rather than asserted.

What does "floating" actually mean mechanically?

Since October 2019, RBI has required every new floating-rate retail loan from a bank to be linked to an External Benchmark Lending Rate (EBLR). In practice, nearly every bank benchmarks this to the RBI repo rate, so your rate is repo rate plus the lender's own spread (credit risk premium and margin), reset at least once every three months. Different banks brand this same mechanism differently, SBI calls it EBLR, HDFC calls it RLLR, but it's the same underlying structure: your rate moves when the repo rate moves, on a lag of at most one quarter.

What actually happens when a floating rate resets?

Here's the genuinely underexplained mechanism. When your floating rate resets upward, most lenders don't automatically raise your EMI. By default, they hold the EMI fixed and quietly extend your tenure instead, only revising the EMI itself if the extension would push the loan past a cap (often your expected retirement age, or a maximum tenure limit). Some lenders let you choose; most default to extending tenure because it's the less disruptive option to communicate. The same EMI-versus-tenure choice shows up after a prepayment too, worked out in real numbers in reduce EMI or reduce tenure.

That default is worth understanding in real numbers, not just in principle. Take the base case again: ₹1,00,00,000 at 7.5% over 20 years, EMI ₹80,559. Three years in, the outstanding balance is ₹92,73,449. Suppose the repo-linked rate resets up by 100 basis points, to 8.5%.

Extending the tenure to protect the EMI feels painless month to month, an extra ₹47 is barely noticeable, but it costs ₹17,03,486 more in total interest over the life of the loan than accepting the higher EMI and keeping the original payoff date, on this single 100bps reset alone. This is the actual mechanism behind the general prepayment advice: see the amortisation section of the methodology page for why extending tenure this way always costs more than holding it fixed, and the prepay vs invest guide for the flip side, that the fastest way to undo this cost is treating the EMI increase as a prepayment target once you can afford it.

Which one should you actually choose?

If you can comfortably absorb an EMI increase without financial strain, floating is usually the better default: it starts cheaper, and RBI's benchmark-linking rules mean the mechanism is transparent even when the direction isn't predictable. Fixed makes more sense if a rate increase would genuinely break your budget and you're willing to pay the premium shown above for that certainty, or if you expect to hold the loan for a shorter period than the fixed leg covers, in which case you may never actually reach the floating conversion at all.