How are Home Loan Interest Rates Determined in India?
Last Updated : May 23, 2020, 5:51 p.m.
The key to a smooth home loan repayment lies with the interest rate that the lender charges on the same. As home loans are long-term loans with tenures ranging around 20-30 years, the interest repayment can be more than the principal amount by the time the loan wraps up. A difference of 0.25%-0.50% in the home loan interest rate can bring a difference of INR 2 lakh to your overall home loan repayment. It is therefore vital to take a home loan at a relatively lower interest rate so that you don’t curse later on. The key is to know the factors that dictate the interest rate. So, without any further delay, let’s quickly get to such factors.
Factors Affecting Home Loan Interest Rates
Loan Amount – The first in the list is the loan amount you avail from the lender. Greater the loan amount, the greater the extent of the credit risk for lenders and vice-versa. Generally, interest rates are segregated across loan amounts of upto INR 30 lakh, INR 30-75 lakh and above INR 75 lakh. The interest rate will be least for loans upto INR 30 lakh and maximum when the loan quantum exceeds INR 75 lakh. Let’s check out the table below to know the interest rates of top lenders according to the loan quantum.
| Lenders | Interest Rate for Loans Upto INR 30 Lakh | Interest Rate for Loans Above INR 30 Lakh-75 Lakh | Interest Rate for Loans Above INR 75 Lakh |
|---|---|---|---|
| State Bank of India (SBI) | 6.95%-7.25% | 7.20%-7.45% | 7.30%-7.60% |
| HDFC Limited | 6.90%-7.60% | 7.00%-7.65% | 7.00%-7.65% |
| ICICI Bank | 6.95%-7.85% | 7.20%-7.95% | 7.30%-8.05% |
Property Value – It doesn’t affect the rate of interest directly but does it indirectly. You will ask how. Let’s be told that the property value dictates the loan amount you will get. And we have seen above how loan amount affects the rate of interest. Loan amounts upto INR 30 lakh, above INR 30 lakh-75 lakh and above INR 75 lakh can be offered at upto 90%, 80% and 75% of the property value.
Employment Status – Lenders offer different interest rates for salaried and self-employed, with the former getting the opportunity to pay the loan at a lower rate than the latter. The table below only adds weight to our point.
| Lenders | Salaried | Self-employed |
|---|---|---|
| State Bank of India (SBI) | 8.80% - 9.75% | 7.10%-7.60% |
| HDFC Limited | 8.50% - 9.40% | 7.05%-7.65% |
| ICICI Bank | 9.65% - 10.05% | 7.20%-8.05% |
| PNB Housing Finance (PNBHFL) | 8.50% - 10.35% | 7.55%-9.10% |
Credit Score – You may be approved a home loan even with a credit score of 650 and below. But if you want to grab home loans at lower rates, your credit score needs to be good. Lenders give weightage to the credit score while deciding about the interest rate. HDFC Limited has recently stated on its website that the interest rate on a home loan will be 7.50% irrespective of the loan amount and employment status if the concerned individual has a credit score (CIBIL) of 800 and above. The same is the case with LIC Housing Finance . We have already told you about the impact of the credit score on the home loan interest rate in our previous post. Click on https://www.wishfin.com/home-loan-rates/home-loan-interest-rates-based-on-different-credit-scores/ to know the impact.
Gender – Some lenders offer home loans to women borrowers at concessional interest rates. SBI, for example, offers home loans to female borrowers at 0.05% lower than their male counterparts.
Income – This greatly determines the repayment capacity of an individual. If you are earning more, you create more space for repayment. This makes lenders charge a relatively lower interest rate, reducing the EMI and interest obligation over time.
Valuation Report – The authenticity of the property is ascertained from the valuation report, which the lender gets from competent officials. These officials visit the property you wish to buy, check the property map and figure out the possible deviations. In case there are some, the same will be mentioned in the valuation report. It could further prompt the lender to raise the interest rate a bit.
Existing Customers – Above factors were for someone seeking a fresh home loan. In case you are already paying a home loan, you must have been witnessing a change in the interest rate. Do you know, how does the change take place? No! Don’t worry, we will let you know the same. Your home loan interest rates are based on benchmark rate changes,
For banks, the benchmark now has become the Repo Rate, the rate at which the Reserve Bank of India (RBI) offers funds to commercial banks to meet their short-term obligations. So as the RBI changes the repo rate, the same could reflect in your home loan interest rate. Whereas Housing Finance Companies (HFCs) follow a different benchmark to price home loans. But given the competition existing in the home loan space, HFCs often change rates in line with the banks to woo customers.
These benchmark rate changes will have a bearing on the interest rate for new customers too. Usually, the interest rate comes a few percentage points above or lower than the benchmark rate. So, the factors mentioned above for new customers will come into play when deciding these points.