How are Home Loan Interest Rates Determined

 Borrowers should possess a thorough knowledge of the key factors influencing home loan interest rates in India before applying for this credit option.

Thanks to the easy availability of home loans, people can now fulfil their dreams of owning a home. Furthermore, the high-value loan amount and the competitive home loan interest rates have made this credit facility popular among homebuyers in India.

The monthly instalments and borrowing costs are significantly impacted by interest rates. Therefore, borrowers should possess a thorough knowledge of the key factors influencing home loan interest rates in India before applying for this credit option.

How Do Financial Institutions Determine the Home Loan Interest Rates

Lending institutions consider the following factors while determining the home loan interest rates for a particular borrower:

Location of the property

The property’s location also impacts the interest rates on a home loan. If a property is located in a posh location with amenities, such as railway stations, grocery shops, hospitals, schools, etc., in proximity, it will have a high resale value.

Consequently, financial institutions will charge a lower interest rate for such properties. On the other hand, choosing a property in an area with poor facilities will result in a higher interest rate.

Income stability of a borrower

The interest rates charged by any financial institution depend heavily on a borrower’s income status. Lenders favour borrowers with a stable source of income. Therefore, salaried people are given lower interest rates because their steady income indicates the ability to pay back loans on time.

Loan quantum

Borrowers should give equal weightage to loan principal. High loan amount will increase home loan EMI burden for a borrower, thus increasing the risks of credit defaults. Hence, financial institution charges a higher interest rate for a greater loan amount.

Borrowers must make sure to pay a sizable down payment if they require a sizable loan principal. A sizable down payment will lower the loan balance, resulting in a lower home loan interest rate.

RBI hikes key interest rate by 35 bps on 07 Dec 2022

 Fight against inflation remains major concern, growth forecast is lowered to 6.8 pc from 7 pc this fiscal says RBI. Reserve Bank of India Governor Shaktikanta Das announces the bi-monthly monetary policy, Wednesday, Dec. 7, 2022 hiked the key policy rate, the repo rate or the rate at which the RBI lends funds to banks, by 35 basis points to 6.25 per cent in a bid to rein in retail inflation.

What impact will the RBI’s decision have?

Lending rates of banks are expected to go up as the cost of funds is expected to rise further. EMIs on vehicle, home and personal loans will also rise. The external benchmark linked lending rate (EBLR) of banks will rise by 35 bps — one basis point is one hundredth of a percentage point— as such loans are linked to the Repo rate. As much as 43.6 per cent of the total loans are now linked to the Repo rate.

Marginal cost of funds-based lending rates (MCLR), which accounts for 49.2 per cent of the loans portfolio of banks, are also expected to move up. The hike will help in moderating inflation in the country.

Deposit rates are also expected to rise in the near future. SBI, India’s largest bank, now offers a 6.10 per cent rate on one-year term deposits.

If the retail inflation cools down, the RBI is likely to pause the rate increases in 2023.

Month	Hike (BPS)	Repo Rate %
May-04	40	4.4
Jun-08	50	4.9
Aug-05	50	5.4
Sep-30	50	5.9
Dec-07	35	6.25