A floating interest rate (also called variable or adjustable rate) is a home loan interest rate that changes over the loan tenure based on market conditions. Unlike a fixed rate that remains constant, floating rates move up or down depending on the benchmark rate set by the Reserve Bank of India (RBI).
How floating rates work: - Your rate = Benchmark rate (repo rate / EBLR) + Spread (bank's margin) - When RBI changes the repo rate, your interest rate adjusts accordingly - Banks must pass on rate changes within a reasonable time frame - Your EMI or tenure changes when the rate changes
Current benchmarking system (since October 2019): Most banks now use External Benchmark Lending Rate (EBLR), linked to: - RBI Repo Rate (most common) - Government of India 3-month or 6-month T-bill yield - Any other benchmark published by Financial Benchmarks India Pvt Ltd
Floating vs Fixed rates in India: - Floating rates are typically 1-2% lower than fixed rates - Over a 20-year tenure, floating rates have historically averaged lower than fixed - However, floating rates carry the risk of increase during rate hike cycles - Most home loans in India (80%+) are on floating rates
Impact on EMI: When rates increase: - Bank may increase your EMI to maintain the same tenure - OR extend your tenure to keep EMI constant - You can choose your preference with most banks
When floating rate is beneficial: - In a declining interest rate environment - For longer tenure loans (more time for rate cycles to average out) - When the rate differential with fixed rate is significant (>1.5%) - When you plan to make prepayments (floating rates have no prepayment penalty)