Almost all public and private sector banks provide home loans, making it a lot easier to access the funding needed to own a dream house. You can use these loans for myriad purposes, such as:
- Buying a plot of land
- Constructing a new house
- Financing renovation of your home
Home loans are always long-term undertakings, which is why the EMIs are generally affordable. But how do banks determine these interest rates applicable? Read on to find out.
How Banks Determine Home Loan Interest Rates
A home loan interest rate is the percentage of the loan amount that the lending institutions charge. The interest rate on a home loan is generally stated on an annual basis and is known as the annual percentage rate (APR).
The home loan interest rates offered by Indian banks are generally of two types: floating and fixed. As its name suggests, the latter has a fixed rate of interest for the entire tenure of the loan.
The advantage associated with a fixed interest rate is that it remains unchanged even when the financial market fluctuates. If the financial market is down, you may consider a fixed-interest rate home loan as your first preference.
On the other hand, the rate of interest on your EMI on a floating interest rate is calculated based on either of the following:
- The base rate, i.e., the standard rate at which the bank lends
- The marginal cost of fund-based lending rate (MCLR)
- Lender’s repo-linked loan rate (RLLR)
In addition to this, it also depends on the spread. It is defined as the difference in the interest rate that a bank receives from borrowers and offers deposits.
Factors Affecting Home Loan Interest Rates
The Reserve Bank of India (RBI) has set certain rules on how banks can determine home loan interest rates. However, the rate of interest on home loans also depends on the following factors:
Repo Rate
The floating rate on home loans changes every time the RBI revises the repo rate. For instance, if the RBI increases the repo rate by 50 basis points, your home loan interest rate will also increase by 50 basis points. Note that the changed rates on your home loan interest rate will reflect only after the ‘reset period’, when the bank revises the rate.
CIBIL Score
CIBIL score reflects your creditworthiness and repayment history. A higher credit score indicates a stable repayment history and hence, enhances your chance of getting a home loan at a lower interest rate.
Repayment Tenure
Some lenders may even charge higher interest rates if you avail home loan for a longer tenure. However, this condition may vary from lender to lender.
Relationship with the Bank
If you have an account with a particular bank or have repaid a previous loan on time, they may consider providing lower interest rates.
How to Choose the Best Home Loan
A home loan is a long-time commitment, with the longest term stretching to 30 years. So, when choosing a home loan, consider the following to select the best one as per your financial requirements:
Rate of Interest
The home loan interest rate is an important factor that you must look at when applying for it. So, look for offers with lower interest rates, as even marginal differences in interest rates can offer huge savings in the long term.
Loan Amount
Banks typically offer 77-90% of the value of your collateral as the loan amount. However, for a higher loan-to-value (LTV) ratio, the interest rates are higher. Here, the smart move is to make a large down payment and lower the loan amount required. This will help you get a better rate.
Processing Fees
This is a fee that banks charge for processing your loan application. These charges may vary from 0.25% to 2%. So, when choosing a home loan, you must select the one that offers a loan at minimal or no processing charge.
How to Improve Eligibility for a Home Loan
If you wish to improve your eligibility for a home loan, you must improve your credit score. Banks consider you a low-risk borrower if you have an excellent credit score. In case you have an additional income source, disclose it to the bank to get lower interest rates.
The key to maintaining a high credit score is timely repayment of monthly instalments of your existing debts. Moreover, applying for a home loan with a co-applicant, generally your spouse, considerably improves your eligibility to avail of home loans.
Home Loan Interest Rates Offered by Different Lenders in 2023
To help you in choosing the best loan, here is a table listing home loan interest rates and processing fees charged by leading lenders:
| Bank/Lending Institution | Interest Rate | Processing Fees |
| Bajaj Finserv | 8.60% to 14% | 0.5% onwards |
| ICICI Bank | 9.25% to 10.05% | 0.05% onwards |
| PNB Housing Finance Ltd. | 8.5% to 10.85% | Up to 1% |
| LIC Housing Finance Ltd. | 8.45% | 0.5% |
| Axis Bank | 8.75% to 14% | 1% or 10,000, whichever is higher |
Different factors affect the rate of interest applicable on a home loan. The best approach when looking for a home loan would be to choose the one with the lowest interest rate. However, you must also take into consideration other charges like processing and foreclosure fees.
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