Floating interest rates, which are based on outside benchmarks like the RBI’s repo rate, go up and down depending on how the market is doing.
With the Reserve Bank of India slashing the key short-term lending rate (repo) by 100 basis points from 6.25 per cent to 5.25 per cent in the financial year 2025-26, one of the most important choices first-time homebuyers will have to make in 2025 is whether to get a fixed or floating interest rate. Right now, the lowest home loan rates in India are 7.35 per cent per year. This is likely to be reduced further as major banks are yet to pass on the benefits to customers. According to experts, if a customer knows about these options, they could save lakhs over the life of their loan.
What are fixed interest rates?
Fixed interest rates stay the same for the whole time you have the loan, so your EMIs will always be the same, no matter what happens in the market. Right now, lenders charge a little more for fixed loans because they are more stable. Your monthly payments will remain the same even if the RBI alters repo rates or the market changes.
What are floating interest rates?
Floating interest rates, which are based on outside benchmarks like the RBI’s repo rate, go up and down depending on how the market is doing. These rates usually start out lower than fixed rates and change based on the economy. When rates go down, you benefit by having lower EMIs or a shorter loan term.
What works best for first-time buyers?
According to Vinayak Deousker, CBO – Easy Home Finance, fixed rates give buyers with steady monthly incomes peace of mind because they know exactly how much money they will have to pay each month.
“You’ll know exactly how much you’re paying for the whole loan term, which makes it easy to plan your budget. This works especially well if you think interest rates will go up in the next few years. Floating interest rates usually start lower than fixed rates, which means first-time buyers can begin with a smaller EMI. But floating rates can move up or down in the future based on market conditions, so borrowers should not assume that EMIs will definitely reduce later,” Deousker said.
Fixed vs floating: Which one is better for you?
“If you have a steady income but not much extra money to cover EMI changes, fixed rates are a good choice. If you’re okay with some uncertainty and want to take advantage of possible rate drops, floating rates might help you save the most money,” Deousker added.
Hybrid options for home buyers
A lot of lenders also offer hybrid options. These start out with fixed rates for the first few years (usually 2 to 5 years) and then switch to floating rates. This keeps you stable while you pay off your debt early and gets you ready to take advantage of future rate cuts. Your long-term financial goals, how much risk you’re willing to take, and how stable your income is will help you make the right choice.
Homebuyers must remember that most floating-rate loans don’t have penalties for paying them off early, so you can do that if you want to.
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