With the Reserve Bank of India (RBI) holding the repo rate at 5.25% for a fourth straight time at its August monetary policy review, borrowing costs are at their lowest since around mid-2022.
That makes the choice between a fully floating-rate home loan and a hybrid loan more consequential. Some banks have begun offering semi-fixed products at competitive rates, partly as they look to deploy excess liquidity following a record wave of foreign currency non-resident (bank) or FCNR(B) deposits.
These are fixed deposits that non-resident Indians hold with Indian banks in foreign currencies such as US dollars. In June, under a special RBI scheme, banks were allowed to offer higher interest rates on these deposits, attracting more than $127 billion before the scheme ended on 31 August. The resulting liquidity has encouraged some lenders to push products such as hybrid home loans.
A hybrid loan fixes the interest rate—or EMI—for an initial period, typically two to five years, before switching to a floating rate. It can suit borrowers who prioritise near-term EMI certainty. A floating-rate loan, meanwhile, may suit borrowers who can absorb higher EMIs or longer tenures and want to benefit if rates fall further.
So, with the repo rate already 125 basis points below its post-Covid peak of 6.5%, does it make sense to pay for stability, or is floating still the better bet?
How hybrid works
A hybrid home loan has two phases. The rate is fixed for an initial period, usually two to five years, before the loan automatically shifts to a floating rate linked to a benchmark.
The fixed phase provides EMI certainty when the outstanding principal is at its highest. Once it ends, the borrower takes on interest-rate risk again.
“A hybrid loan may suit borrowers who want certainty over their initial borrowing cost but are willing to take some interest-rate risk later,” said Adhil Shetty, chief executive, BankBazaar.
The structure is therefore a bet on the direction of rates. Borrowers expecting rates to rise may value the fixed phase, while those expecting further cuts may prefer floating because reductions can reach their loan sooner.
Floating still dominates
Floating-rate loans accounted for 73.37% of India’s home-loan market in 2025, according to a June report by Mordor Intelligence. Borrowers have preferred them because rate changes are linked to transparent external benchmarks and cuts are transmitted relatively quickly. But floating is not automatically cheaper.
Rate changes can take time to reach borrowers. When rates rise, lenders may increase the loan tenure rather than the EMI, protecting monthly cash flow but increasing total interest paid. Conversely, a rate cut may not fully reduce the borrower’s cost if the lender changes its spread.
Borrowers therefore need to track not just the interest rate but also changes in EMI, tenure and total interest outgo.
The price of certainty
The main drawback of a hybrid loan is that certainty can come at a premium.
“Lenders usually charge a higher fixed rate in hybrid home loans than their prevailing floating-rate loans,” said Santosh Agarwal, chief executive, Paisabazaar.
Mangesh Zope, founder, Peaceful-Loans, said lenders have to price in the risk of locking the rate while their own funding costs can change.
That is why hybrid products remain relatively uncommon. ICICI Bank, HSBC India and Kotak Mahindra Bank are among the lenders offering such variants, but they are not yet widely available.
HSBC India offers a three-year fixed period starting at 7.5%, compared with 7.45% for its floating-rate loan. Its five-year fixed option starts at 8.25%. ICICI Bank allows borrowers to lock in their EMI for two to 10 years, with fixed-period rates starting at around 9%, compared with approximately 8.5% for floating loans.
Kotak Mahindra Bank’s recently introduced hybrid loan is different: its fixed-period rate is the same as its floating rate. Borrowers can lock in an interest rate for 39, 52 or 65 months before moving to a floating structure; the current starting rate is 7.6% for the fixed phase. The strongest proposition is that there is no premium over a floating-rate loan, although the final rate depends on the borrower’s credit profile.
This pricing is possible because Kotak is among the top private banks that participated in FCNR(B) mobilization, according to brokerage reports. Because these deposits are exempt from cash reserve ratio and statutory liquidity ratio rules, banks do not have to keep part of the money idle or in low-yield government bonds and can lend almost the entire amount.
Nakul Saxena, business head, home loans, Kotak Mahindra Bank, said the bank hedges the risk created by the fixed-rate period.
“Our treasury raised its own funds on a matching tenure and rate profile upfront, so if rates move against it later, that exposure is already hedged. If we're lending, say, ₹3,000 crore over 65 months, we map our own borrowing accordingly, so that we're not carrying a higher risk on our books,” he said.
Saxena added that the product is aimed at first-time borrowers who may be financially stretched and do not want their EMIs to rise, as well as financially informed borrowers who believe rates are unlikely to fall further in the near term.
Read the fine print
According to Shetty, borrowers should look beyond the initial fixed rate and understand how long it applies, the rate thereafter, the benchmark and spread used for the floating rate, and any switching or prepayment charges.
Consider a ₹2 crore loan for 25 years at a fixed rate of 7.5% for the first 36 months. If the fixed rate is 5 basis points higher than a fully floating structure, but the repo rate rises by 0.25% three times in the sixth, ninth and 12th months, the borrower stands to save ₹3.98 lakh in interest, according to calculations sourced from Peaceful-Loans.
But that is a best-case scenario. It assumes the rate was fixed in a low-rate regime, as is the case now, and that the central bank raised rates aggressively in the first year. The benefit could be very different if the repo rate falls during the fixed period or rises only marginally.
The rate a bank ultimately offers also depends on the borrower’s credit score, and a hybrid loan is no exception. Zope said borrowers should compare rates based on their credit score. Someone with a very high score may qualify for a low floating rate and have little reason to pay a premium for a hybrid loan. A borrower with a weaker score, say 700–725, may be offered a higher floating rate, narrowing the gap with the hybrid loan’s initial fixed rate. In that case, paying a small premium for certainty could make sense.
If the central bank starts cutting rates after a borrower locks into a hybrid loan, switching to floating is an option—but it can be costly.
Shetty said borrowers should check the terms that apply after the fixed period ends, since the floating rate they move to could be significantly different from the rate at the start. “Borrowers should therefore look at the overall cost rather than focus only on the initial rate or EMI,” he said.
Agarwal added that switching from a hybrid loan to a floating-rate loan also entails a fee, making the fine print critical. The fee is typically 0.5% to 4% of the outstanding principal, plus 18% GST, depending on the bank, the terms of the specific hybrid loan and how early the switch is made.
Borrowers should also ask how the floating rate will be calculated after the switch and whether the spread is fixed or subject to revision. Part-prepayment conditions, balance-transfer costs, processing fees and other charges should also be checked before comparing the total cost of a hybrid and floating-rate loan.
In most cases, a transparent repo-linked floating loan will be cheaper. A hybrid loan makes sense mainly when the premium is minimal and near-term EMI stability is a priority. If the premium is 40–100 basis points, the bet works only if the repo rate rises by more than that during the fixed period.