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Ever Wondered Why Home Loan Interest Rates are More for Self-employed

Highlights

  • Is an irregular flow of income the reason behind a higher home loan rate for self-employed?
  • Yes, it is! But that is not the sole reason, there are quite a few more which you can can know after reading this post

Differences exist everywhere including your very own home loan. Even as the home loan is available to both salaried and self-employed, differences exist in their respective interest rates. This brings a difference in the Equated Monthly Installment (EMI) and interest obligations for both. Let’s be told that salaried people get a rate of interest lower than their self-employed counterparts. Why are these two charged differently across the loan amount even as both earn in this fast-paced life? Let’s not fret too much, instead, read this article which pens down the reasons for the same.

Income Irregularity

Salaried gets a certain amount of salary at the end of every month, so this creates the possibility of a regular flow of income. Even if they lose their job, they can get it and repay the debt. Whereas, self-employed don’t have the luxury of regular income. As businesses are volatile in nature, the earnings can’t be the same all the time. Plus, there are many seasonal businesses that boom for specific periods and remain flat otherwise. All this creates uncertainty about the flow of income and makes lenders charge a greater rate of interest in the case of self-employed.

Under Reporting of Income

Salaried can’t hide their income as it is shown clearly in their salary slips showing the amount against each component such as basic salary, dearness allowance and other allowances. One can also see provident fund deductions, if any. But many self-employed manoeuvre their income to lower the tax burden or so. They might show a greater turnover, but would under-report their net and gross incomes, raising the credit risk for lenders further. Keeping this in mind, lenders charge a higher interest rate to recover more from self-employed.

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Average Balance in the Bank Account

Salaried are also told to provide bank statements like their self-employed counterparts. Lenders check the transactions for both salaried and self-employed while assessing the interest rate for them. For self-employed, lenders check the average balance of the account and calculate the same based on the day end balance in every 5 days of the month. As business transactions don’t remain linear, there’s quite a possibility of not having the required amount on the proposed date of the EMI. This poses a degree of credit risk for lenders and prompts them to levy a higher interest rate. Plus, self-employed mostly have current accounts meant for frequent business transactions. In case the business faces crunch, transactions may decline and cause payment delays or defaults. On the other hand, obtaining a savings account, which is largely meant for maintaining the saving reserves, is quite difficult in their case. That leaves lenders with no choice but to hike their rates.

These are possibly the reasons that force lenders to levy a higher interest rates in the case of self-employed.

Home Loan Interest Rates for Salaried & Self-employed

After knowing the reasons why self-employed are charged more, it’s time we see the actual rates for both salaried and self-employed. This will help the readers of both segments gauge their cost on a loan. Let’s begin!

State Bank of India

The country’s largest lender State Bank of India (SBI) offers arguably the lowest home loan interest rates to its borrowers. But still self-employed are a distance away from grabbing the lowest on offer. The table below will prove this point!

HDFC Limited

If SBI has any competitor in the home loan segment, it has to be the premier mortgage player i.e. HDFC Limited. Here, the rates for salaried and self-employed can be the same. But that privilege is restricted only to self-employed professionals like doctors, architects and chartered accountants running their own firms. However, self-employed non-professionals like Kirana shop owners, mall owners and others will have to pay at a higher rate of interest. Check out the table below to know what the rates are.

Loan Amount (In INR)Salaried/Self-employed ProfessionalsSelf-employed Non-professionals
Upto 30 Lakh7.85%-8.35%8.00%-8.50%
Above 30 Lakh-75 Lakh8.00%-8.50%8.15%-8.65%
Above 75 Lakh8.10%-8.60%8.25%-8.75%

ICICI Bank

The third in the list is ICICI Bank that makes the previous two giants constantly innovate their product offerings if not keeping them on their toes. Presently, this Mumbai-headquartered private lender offers the following rates for salaried and self-employed across different loan amounts.

Loan Amount (In INR)SalariedSelf-employed Non-professionals
Upto 35 Lakh8.10%-8.75%8.35%-9.00%
Above 35 Lakh-75 Lakh8.25%-8.90%8.45%-9.10%
Above 75 Lakh8.45%-9.10%8.55%-9.20%

LIC Housing Finance

The housing finance arm of the life insurance major LIC also offers different rates for salaried and self-employed. But like HDFC, the rates for salaried self-employed professionals will be the same and the rates will be higher for self-employed non-professionals. For extensive details, check out the rates below.

Note – Individuals with a credit score (CIBIL) of >=800 will be offered a 7.50% interest rate at LIC HFL, irrespective of the loan amount and the profession of individuals.

On an average, you could see a difference of 0.15%-0.20% in the interest rate between salaried and self-employed across these lenders. In the current scenario, a home loan of INR 50 Lakh can be offered at around 8.10% and 8.35% to salaried and self-employed, respectively, for 20 years? How much of a difference will exist in the overall outgo with the difference in the interest rate? You can see that in the table below.

ProfessionLoan AmountInterest RateTenureEMIInterest Outgo
SalariedINR 50,00,0008.10%20 YearsINR 42,134INR 51,12,092
Self-employedINR 50,00,0008.35%20 YearsINR 42,918INR 53,00,236

The difference between the two EMIs may just be 784. But the difference of interest is a significant amount of INR 1,88,144.

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  • Home Loan Interest Rates July 2020
    Axis Bank7.75% - 8.55%
    Bank of Baroda6.85% - 7.85%
    Citibank8.20%
    HDFC7.55% - 8.45%
    ICICI Bank7.45% - 8.55%
    Indiabulls Housing Finance Limited8.80% - 11.05%
    Kotak Bank7.40% - 9.70%
    LIC Housing7.40% - 8.85%
    Piramal Capital & Housing Finance9.00% - 9.10%
    PNB Housing Finance8.60% - 9.45%
    Reliance Home Finance8.75% - 14.00%
    State Bank of India/SBI7.35% - 8.00%
    Tata Capital9.20% - 9.35%