Home Loan Interest Rate

Since home loans are usually high-ticket size loans, banks and HFCs do a careful and detailed assessment of the borrower’s credit history, repayment capacity, income along with stringent checks on the property to be purchased. For borrowers seeking a home loan, they must be aware of the factors lenders look at while processing a home loan application, and have a deep awareness of their own eligibility. It needs to be noted that low-interest rates also usually come with stricter eligibility conditions. Here are the factors that lenders evaluate to determine your eligibility for a home loan and the interest rate to be offered:

• Credit score: Your credit score is a numerical representation of your credit history. Those who have paid their  EMIs and credit card bills in full, timely, and have not been over-dependent on credit in the past are likely to have a good credit score. If your credit score from CIBIL and other bureaus is 750 and above, lenders would see you favorably for a home loan. Also, banks and HFCs are increasingly using the credit score of the home loan applicants to fix their home loan interest rates. As a high credit score reflects responsible credit behaviour and financial discipline, many banks and HFCs offer home loans to applicants with higher credit scores at a lower interest rate. Please note that if the home has a co-ownership, the credit score of each owner is likely to be checked by the lender, even if the loan is taken by a single co-owner.

Get Your Free Credit Report with Monthly Updates Check Now

• Income and employment: Another key factor lenders evaluate is your income, type of employment, and profile of your employer. Home Loan applicants employed with government or PSUs or those working with large and/or reputed private sector organizations are usually preferred by lenders due to their higher job/income certainty. Hence, lenders offer lower home interest rates to such applicants. On the other hand, if you are self-employed with erratic income flows or have an unstable job profile, or have just begun your professional journey, getting a Home Loan at a lower rate of interest may be difficult.
• Loan amount: The loan amount you seek to borrow can also influence the rate at which you get the housing loan. Home loans up to Rs. 30 lakh usually have a lower interest rate as compared to home loans of higher amounts. To get a better rate of interest on your home loan, one should try and make the maximum down-payment possible. This will not just reduce the overall loan burden but may also help get a lower rate of interest on their loan.
• Type of home loan: Home loan rate of interest also differs as per the types of home loan. Regular home loans have standard rates while their counterparts such as Plot Loan or NRI Home Loans usually have a higher rate of interest.
• External benchmark rate: As per RBI’s notification, housing loan interest rates sanctioned by banks from October 2019 are linked to external benchmark rates like the RBI Policy Repo Rate, the Government of India 3-Months and 6-Months Treasury Bill yields published by Financial Benchmarks India Private Ltd (FBIL) and any other benchmark market interest rate published by FBIL. Under the new regime, any change in the external benchmark rate will affect the home loan interest rate of all banks in India.
• The lesser interest rate for women home loan borrowers: Most banks provide concession on home loans, typically 0.05% lesser interest rate to women borrowers. Hence, it is advised that married couples should consider taking a joint-home loan and make the wife the primary applicant if they can get a lower rate of interest. Availing joint home loan will also increase your home loan eligibility as well as home loan tax benefits.
• Type of interest rate: Home loan rate of interest is of two types – fixed and floating. The type of interest rate you choose for your home loan will determine the rate at which you will repay your lender. In the case of fixed-rate home loans, EMIs remain the same for the entire loan period. Floating rates, on the other hand, change as per change in its lending rate such as Repo Linked Lending Rate (RLLR). Lenders usually charge higher interest rates on home loans offered on fixed interest rates due to the higher interest rate risk involved with fixed-rate home loans.

Apply for Home Loan at Low Interest Rates Apply Now

Q1. What is Pre-EMI interest?

Ans. At times a home loan is disbursed in tranches, depending on the stages of completion of a housing project. Till the final disbursal of the loan amount, borrowers may be required to service the interest cost incurred on the disbursed loan amount. This interest is known as Pre-EMI interest. Pre-EMI interest is payable every month from the date of initial disbursement until the date of commencement of EMI.

Q2. Is there a way to check the total interest cost payable on the home loans?

Ans. Home loan applicants can use Home loan EMI calculators for calculating the total interest cost payable on their home loans. They simply need to enter their home loan amount, tenure and interest rates into these calculators for calculating the EMI and the total interest cost of the home loan.

Q3. Can I switch my fixed rate of interest to floating rate during the loan period? Are there any charges involved?

Ans. Yes, you can switch from fixed rate to floating rate of interest. However, lenders usually charge 0.5% of the outstanding principal as a conversion fee.

Q4. What is External Benchmarking based Lending Rate?

Ans. External benchmark-based lending rate (EBLR) is the reference rate used for setting the interest rates for loans based on external benchmarks like RBI’s repo rate, T-Bill yields, etc. Prior to the introduction of EBLR, banks set interest rates for their floating rate loans after considering internal factors like cost of their deposits, operating costs, cash reserve ratio, etc. As per the RBI’s guidelines, all retail and MSME loans offered by banks on floating rates has to be linked to EBLR. EBLR was introduced with the aim of quickening the transmission of policy or market interest rate changes to the borrowers.

Q5. Which other external benchmarks do banks use to set home loan interest rates?

Ans. Apart from the Reserve Bank of India’s policy repo rate, other external benchmarks that banks use to set home loan interest rates include:

• Government of India 3-Months Treasury Bill yield published by the Financial Benchmarks India Private Ltd (FBIL)
• Government of India 6-Months Treasury Bill yield published by the FBIL
• Any other benchmark market interest rate published by the FBIL

Q6. Which bank offers the lowest home loan rate of interest for salaried and self-employed?

Ans. Bajaj Housing Finance offers the lowest home loan interest rate of 7.20% p.a. onwards to both salaried individuals and self employed professionals.

Also Check:- How much home loan can I get based on my salary?

Q7. How frequently would my EBLR-based home loan interest rates change during my home loan tenure

Ans. The changes in the interest rates of your EBLR-based home loan would depend on the changes in the external benchmark rates used by your bank and the set frequency of their interest rate reset. RBI guidelines require banks to reset their EBLR-linked interest rates at least once in 3 months.

Q8. Can my credit score impact my home loan interest rate?

Ans. Banks add spread and credit risk premium to their EBLR while setting their home loan interest rates. Banks consider credit score, employers’ profile, occupation profile, income, etc. among other factors for setting the credit risk premium for their home loan applicants. As a high credit score indicates financial discipline and regular repayments and thereby reduces the credit risk for the lenders, many banks charge lower credit risk premium to borrowers having higher credit score. These results in lower home loan interest rates for borrowers having higher credit score.

Q9. Can the credit risk premium component of my home loan interest rate change during the loan tenure?

Ans. As per the RBI guidelines regarding the external benchmark based lending rate, banks have been allowed to change credit risk premium component if the borrower’s credit risk assessment undergoes a significant change during the loan tenure.

Q10. Can the other components of the spread used in my home loan interest rate change during the loan tenure?

Ans. As per the RBI guidelines, your bank can change the other components of the spread used for setting your home loan interest rate once in three years.

Q11. Can adding a co-applicant help me get a lower rate of interest?

Ans. Yes, adding an earning female member of your family as a co-applicant might help you get home loan at a lower interest rate. Lenders like SBI, HDFC, Union Bank of India, Bank of India, etc. offer interest concession of 0.05% to women applicants.