Home loan basics: fixed vs floating rate, tenure and EMI

How the loan is structured

You borrow a portion of the property price and repay it in equal monthly instalments (EMIs) over the tenure, which can run up to around 30 years. The lender finances only part of the price, and you pay the rest as your down payment. The regulator limits how much of the property value a lender may finance, and the limit is generally lower for higher-value properties, so plan for a meaningful down payment.

In the early years most of each EMI is interest and only a little repays the principal. Over time this reverses. That is why paying off or transferring a loan early in its life has the biggest effect.

Fixed vs floating interest rate

With a fixed rate, the rate stays the same for a set period, which makes the EMI predictable. Fixed rates are often higher at the start and, on many home loans, are fixed only for an initial period after which the loan moves to a floating rate.

With a floating rate, the rate is linked to an external benchmark, such as the repo rate for bank loans, and it moves when the benchmark moves. When rates fall, your loan gets cheaper; when they rise, it gets more expensive. Most home loans in India are floating.

When the rate changes, the lender typically either changes your EMI or changes your tenure. Ask which one applies, because raising the tenure quietly can add years to the loan.

How the tenure changes the cost

A longer tenure gives a lower EMI and therefore easier monthly cash flow, but you pay much more interest overall. A shorter tenure is the opposite. A sensible approach is to choose the shortest tenure whose EMI you can comfortably pay, and then prepay when you can. Use the EMI and loan tools on Truely Money to see the total interest for different tenures.

What else you pay

• Processing fee, usually a percentage of the loan, and possibly legal and valuation charges.
• Stamp duty and registration on the property, which are separate from the loan.
• Home loan insurance, if you choose it, which protects the loan if something happens to you.
• Prepayment: under current regulator rules, lenders generally cannot charge a prepayment penalty on floating-rate home loans taken by individuals. Check the terms of your specific loan, since fixed-rate loans can differ.

What affects the rate you are offered

Your credit score, income stability, the loan amount relative to the property value, and the type of employer all influence the rate. A stronger profile can bring a lower rate, so improving your score before applying can save real money over the years.

Tax benefits

Home loans can carry income tax deductions for interest and principal repayment, subject to limits and to which tax regime you choose. The rules change, so check the current provisions or ask a tax professional.

This is general information, not personal financial advice.