When you take a home loan, or when your rate resets, you may be asked to choose between a fixed and a floating rate. A fixed rate gives certainty. A floating rate is usually lower to start with, but it can go up or down. With RBI raising the repo rate to 5.50% on 7 October 2026, more borrowers are asking whether to lock in. This guide explains how each works, what switching costs, and how to compare them with real numbers.
What is the difference between fixed and floating rates?
- Floating rate: your rate is linked to a benchmark and changes when the benchmark changes. Since 1 October 2019, new floating-rate home loans from banks have had to be linked to an external benchmark, often the RBI repo rate, which must reset at least once in three months. Your EMI (equated monthly instalment), your tenure, or both can change at each reset.
- Fixed rate: RBI's directions for banks define a fixed-rate loan as one where the rate is fixed for the entire tenor of the loan. Your EMI stays the same whatever happens to the repo rate.
- Hybrid or dual-rate: the rate is partly fixed and partly floating. A common form is fixed for the first few years, then floating. HDFC Bank's "TruFixed" loans, for example, have an initial fixed period. RBI treats the floating part of a hybrid loan under its floating-rate rules.
RBI lets banks offer any category of loan at either a fixed or a floating rate. Which products a lender actually offers, and at what price, is its own choice.
Watch the wording. Some products called "fixed" are only fixed for a few years and then reset. Ask the lender exactly how long the rate is fixed and what happens after that.
Why is a fixed rate usually higher?
With a fixed rate, the lender takes on the risk that rates rise. It charges for that risk up front. The gap can be large. Union Bank of India's retail rate sheet effective 8 October 2026 is one public example:
| Option at Union Bank of India | Rate or terms (as of 8 October 2026) |
|---|---|
| Floating home loan (Union Home) | From 7.40% to 9.60%, depending on credit score band and borrower type |
| Fixed-rate home loan scheme, labelled "for maximum 5 years" | 11.40% up to ₹30 lakh; 12.40% above ₹30 lakh to ₹50 lakh; 12.65% above ₹50 lakh to ₹200 lakh |
| Switch from floating to fixed | One-time option after at least 12 EMIs, at 1.00% over your floating rate on the date of switch; reset after 5 years to 1% over the floating rate then |
| Switch charge | ₹10,000 + GST for loans up to ₹50 lakh; ₹15,000 + GST above ₹50 lakh |
Other lenders price differently. Ask for the rate, the fixed period and all fees in writing.
Worked example: does locking in pay off?
Take a ₹40,00,000 home loan for 20 years (240 months) at a floating rate of 7.60%. EMIs use the standard formula: EMI = P × r × (1 + r)^n ÷ ((1 + r)^n − 1), where P is the loan, r is the monthly rate (yearly rate ÷ 12 ÷ 100) and n is the number of months. The EMI is ₹32,469.
After 12 EMIs you owe ₹39,11,328, with 228 months left. Suppose your lender offers a switch to a fixed 8.60% for the next 5 years (1 point above your floating rate) for ₹11,800 (₹10,000 + 18% GST). The table compares the interest you would pay over those 5 years (60 months) if the floating rate moved straight away to each level and stayed there. In each case the EMI is reset so the loan still ends on time.
| Floating rate over the 5 years | EMI | Interest over 5 years | Fixed 8.60% + fee vs this |
|---|---|---|---|
| Stays at 7.60% | ₹32,469 | ₹13,88,431 | Fixed costs ₹2,05,033 more |
| Rises to 8.10% | ₹33,663 | ₹14,84,835 | Fixed costs ₹1,08,629 more |
| Rises to 8.60% | ₹34,877 | ₹15,81,664 | Fixed costs ₹11,800 more (the fee) |
| Rises to 9.10% | ₹36,111 | ₹16,78,885 | Fixed saves ₹85,421 |
| Rises to 9.60% | ₹37,364 | ₹17,76,469 | Fixed saves ₹1,83,005 |
The fixed option at 8.60% has an EMI of ₹34,877 and interest of ₹15,81,664 over the 5 years, plus the ₹11,800 fee. The lesson: a fixed rate only wins if the floating rate rises by more than the premium (here, 1 point) and stays up for most of the fixed period. If rates stay flat or rise a little, floating costs less. Nobody can know in advance which way rates will go, so treat a fixed rate as paying for certainty, not as a way to save money.
This example is simplified. Real floating rates move in steps at each reset, not all at once.
Can you switch between fixed and floating later?
RBI's 2023 rules on resetting floating rates once required lenders to offer borrowers a switch to a fixed rate at reset. From 1 October 2025, RBI amended this. A lender may, at its option, offer the switch as per its Board-approved policy, and that policy may limit how many times you can switch during the loan. So the switch is now the lender's choice, not your right. RBI has since folded many older circulars into consolidated directions (November 2025), so check the latest directions.
Switching costs vary. Union Bank's charges are shown above. Other lenders charge their own conversion fee, often a percentage of the outstanding principal plus taxes. On a ₹40 lakh loan, even a 1% fee would be ₹40,000 before taxes, so ask for the exact amount in writing and check your lender's current fee page and Key Facts Statement.
Do prepayment charges differ for fixed and floating?
Yes, and this matters. RBI's prepayment charges directions apply to loans sanctioned or renewed on or after 1 January 2026:
- Floating-rate loans to individuals for purposes other than business, with or without co-borrowers: no prepayment charges, whatever the source of funds and with no minimum lock-in period.
- Fixed-rate loans: prepayment charges, if any, follow the lender's approved policy. For term loans they must be based on the amount being prepaid.
- Dual or special rate loans: whether the no-charge rule applies depends on whether the loan is on a floating rate at the time you prepay.
- Any charge must be disclosed in the sanction letter, the loan agreement and the Key Facts Statement. Undisclosed charges cannot be levied.
If you plan to prepay or move your loan to another lender in a few years, a fixed rate may limit your options. Read the prepayment clause before you choose.
Which one should you pick?
A floating rate may suit you if:
- You can absorb a higher EMI, or a longer tenure, if rates rise.
- You plan to prepay or switch lenders, and want no prepayment charges.
- The fixed-rate premium on offer is large.
A fixed rate may suit you if:
- Your budget cannot handle any rise in EMI.
- The premium over floating is small and the fixed period is long.
- You do not plan to prepay or switch during the fixed period.
What should you ask before choosing a fixed rate?
- Is the rate fixed for the whole loan or only for a period? What happens after?
- What are the prepayment and foreclosure charges?
- What does it cost to switch back to floating later?
- What is the APR (annual percentage rate, which includes fees) in the Key Facts Statement?
- How does the fixed rate compare with the floating rate you would get today, in rupees?
Do it in 10 minutes, free
Use the rate change calculator on LowerMyEMI to see what a rise or fall in your rate does to your EMI and tenure, and export it to Excel or PDF. If your floating spread is high, LowerMyEMI can also write a letter asking your bank for a lower spread, and one email per lender asking for their best offer, which you send from your own email. Lenders decide the rate; nothing is guaranteed.