Fixed-Cum-Floating Rate VS Regular Floating Rate Loans – Which One Should You Choose?

If you're buying a home, the type of interest rate you choose can make a huge difference. Understanding your interest rate is crucial, as it has a long-term impact on your financial situation and repayment obligations, especially in the case of home loans.

While borrowing, borrowers often come across two options - the regular floating rate and the fixed-cum-floating rate scheme. Many borrowers get confused between the two. They sound similar but behave very differently over time. With rates moving up and down depending on the Reserve Bank of India’s monetary policy decisions, it’s wise to understand how both work before signing on the dotted line.

What Is a Regular Floating Rate Loan?

A floating rate loan is linked to a benchmark. This could be the RBI’s repo rate or an external benchmark chosen by your lender. The rate moves up or down depending on how the benchmark changes. If the repo rate goes up by 50 basis points, your interest rate and EMI will likely increase too. When the rate drops, your loan gets cheaper. These loans don’t offer any interest rate stability. That’s the risk and also the reward. Regular floating rates are popular when rates are falling. But they can be unpredictable during rising cycles.

What’s a Fixed-Cum-Floating Scheme?

This scheme combines both fixed and floating rate. The rate is fixed for a certain number of years, usually two to five. After that, it switches to floating. It gives you a cushion against rate hikes in the early years. For example, if you get a home loan with a 3-year fixed rate of 8.5%, your EMI stays unchanged during that period. Even if the RBI increases the repo rate, your instalments won’t rise. After three years, the rate becomes floating and follows the market. It’s a way to buy peace of mind initially.

Why Banks Offer Fixed-Cum-Floating Loans

Banks offer these hybrid loans to attract cautious borrowers. Many people are in doubt about future rate hikes. For them, fixed-cum-floating rate offers comfort. Banks can also price the fixed part slightly higher and recover returns early. Once the fixed period ends, they can adjust rates in line with market changes. For lenders, this reduces interest rate risk. Such schemes are common in-home loans and each bank may offer a different fixed term or spread.

How Should You Pick?

If you think rates are at rock bottom, a regular floating loan makes sense. You benefit when rates drop further. But if rates are rising or are expected to rise, fixed-cum-floating loans can shield you for some time. They work best for those who want a steady outgo in the early years - especially salaried borrowers. The fixed period allows better budgeting. But remember, once the loan becomes floating, the bank decides the rate based on its spread and benchmark. Always check the margin they apply post the fixed phase. It may be higher than you expect.

Things to Watch Before Choosing

Read the agreement carefully. Some lenders charge a conversion fee when moving from fixed to floating. Others may reset your loan based on internal benchmarks.

Adhil Shetty, CEO of Bankbazaar.com, says, “Make sure the benchmark is transparent - repo-linked rates are more reliable. Also, check foreclosure rules. Some banks allow early repayment during the floating phase but not in the fixed phase. Compare the total cost over the loan tenure. Sometimes a low initial rate hides higher long-term costs. Don’t go by EMI alone - understand the full structure.”

Loan structures can look simply but hide fine print. Between fixed-cum-floating and regular floating loans, there's no one-size-fits-all. Choose based on your income pattern, rate outlook, and comfort with risk. Do the maths and never assume the cheapest EMI today will stay the same tomorrow. After all, in lending, it’s not just about how much you borrow, but also how smartly you borrow.

Powered by Torbit Realty.