A floating rate home loan moves with an external benchmark, usually RBI’s repo rate, so your EMI or tenure changes when rates change. A fixed rate stays the same for an agreed period, which gives certainty but typically costs more at the start and may carry prepayment charges. Most home loans in India are floating, and since 2019 new floating loans from banks to individuals must be linked to an external benchmark.
Key takeaways
- New floating rate retail loans from banks have been linked to an external benchmark, most commonly the repo rate, since 1 October 2019.
- Your rate equals the benchmark plus a spread; the spread is fixed at sanction unless your credit risk changes substantially.
- RBI lets you choose a higher EMI, a longer tenure or a switch to fixed rate when your floating rate resets.
- For floating rate loans to individuals sanctioned or renewed from 1 January 2026, RBI bars prepayment charges.
How a floating, repo-linked loan works
From 1 October 2019, RBI required banks to link new floating rate personal and retail loans, including home loans, to an external benchmark. Banks could choose RBI’s repo rate, a 3-month or 6-month Treasury bill yield, or another benchmark published by Financial Benchmarks India Pvt Ltd. Most banks chose the repo rate, which is why these are often called repo-linked lending rates (RLLR) or external benchmark lending rates (EBLR).
Your interest rate is built like this:
- Benchmark: for example, the repo rate. RBI’s Monetary Policy Committee held the repo rate at 5.25% at its August 2026 meeting. Check RBI’s website for the latest decision before you sign.
- Spread: the lender’s margin, which covers its costs and your credit risk. Under RBI rules, the credit risk premium can change only if your credit assessment changes substantially.
RBI requires the rate under an external benchmark to be reset at least once every three months. When the repo rate falls, your rate should fall at the next reset, and when it rises, your rate goes up. Housing finance companies and older bank loans may use internal benchmarks such as MCLR or a prime lending rate, which tend to move more slowly.
What a fixed rate really means
Few lenders offer a rate that is fixed for the full 20 or 30 years. More often, “fixed” means one of these:
- Fixed for an initial period (for example, the first few years), after which the loan converts to floating.
- Fixed with a reset clause, where the lender can revise the fixed rate at set intervals.
- Truly fixed for the full tenure, which is uncommon and usually priced higher.
Read the sanction letter closely. If the rate can be revised, it is not the certainty you may be paying for.
Fixed vs floating at a glance
| Feature | Floating (repo-linked) | Fixed |
|---|---|---|
| Starting rate | Usually lower | Usually higher |
| EMI predictability | Changes with the benchmark | Stable for the fixed period |
| Benefit when rates fall | Passed on at the next reset | None during the fixed period |
| Risk when rates rise | EMI or tenure increases | Protected during the fixed period |
| Prepayment charges | Not allowed for individuals on loans sanctioned or renewed from 1 January 2026, as per RBI | Lender may charge, based on the amount prepaid, if disclosed upfront |
| Transparency | Benchmark is public; you can track it | Depends on the lender’s terms |
Your rights when a floating rate resets
In August 2023, RBI told lenders to handle floating rate resets on EMI-based loans more transparently. Among other things, lenders must:
- Explain at sanction how a change in the benchmark could affect your EMI, tenure or both.
- Give you the option at reset to switch to a fixed rate, as per their board-approved policy, with the switching charges disclosed.
- Let you choose between a higher EMI, a longer tenure or a combination, and allow part or full prepayment at any time.
- Ensure tenure extensions do not cause negative amortisation, where the outstanding balance grows even though you are paying.
- Send quarterly statements showing principal and interest recovered, EMI, number of EMIs left and the annualised rate.
Many lenders extend the tenure by default when rates rise, which keeps the EMI unchanged but increases the total interest you pay. If you can afford it, choosing a higher EMI instead keeps the loan on track.
Prepayment rules from 2026
RBI has long barred banks from charging foreclosure penalties on floating rate home loans to individuals. Its Pre-payment Charges on Loans Directions, 2025 extend and clarify this: for floating rate loans to individuals for non-business purposes sanctioned or renewed on or after 1 January 2026, regulated lenders cannot levy prepayment charges, whether you prepay in part or in full, from any source of funds and without a minimum lock-in. For fixed rate loans, any charge must be disclosed in the sanction letter and Key Facts Statement. This matters if you plan to prepay using a bonus or sale proceeds, or to move the loan later. See our guide to home loan balance transfer.
How to choose
- Choose floating if you have some room in your monthly budget, plan to prepay, or want falling rates to reach you quickly. This suits most buyers with long tenures.
- Consider fixed if your budget is tight and a rise in EMI would cause real strain, and the fixed rate is truly fixed for a meaningful period at a premium you are comfortable paying.
- Compare the spread, not just the headline rate. Two repo-linked loans move together, so the spread decides which is cheaper for the life of the loan.
Whatever you choose, keep the EMI within a comfortable share of income. Our guide on home loan EMI and property budget can help you test that before you shortlist independent houses and villas or flats in Coimbatore.
Frequently asked questions
What is a repo-linked home loan?
It is a floating rate loan where the interest rate is the repo rate set by RBI plus a spread fixed by the lender. When RBI changes the repo rate, the loan rate changes at the next reset, which must happen at least once every three months.
Can I switch from floating to fixed later?
Yes. RBI requires lenders to offer an option to switch to a fixed rate at the time of reset, as per their board-approved policy. Check the switching charges in your sanction letter or Key Facts Statement.
Why did my tenure increase instead of my EMI?
When rates rise, lenders often extend the tenure to keep the EMI unchanged. RBI requires lenders to let you choose a higher EMI, a longer tenure or a mix, and to tell you about the change.
Is there a penalty for prepaying a floating rate home loan?
For floating rate loans to individuals for non-business purposes sanctioned or renewed from 1 January 2026, RBI does not allow regulated lenders to charge prepayment penalties. Check your loan terms for older loans and for fixed rate loans.
This article is general information as of September 2026, not legal, tax or financial advice. Rules and rates change; confirm with a qualified advocate, chartered accountant or the relevant department before you act.
References
- RBI (Pre-payment Charges on Loans) Directions, 2025
- RBI FAQs: Reset of floating interest rate on EMI based loans
- Business Standard: RBI asks banks to link new floating rate loans to repo from October 2019
- Forbes India: RBI MPC August 2026, repo rate unchanged at 5.25%
Buying a home in Coimbatore this year?
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