What is the reasoning behind the Fluctuation of Home Loan Interest Rates - Home Loan Stories - Kotak Bank

22 AUGUST, 2019

The interest rates on a home loan have always been one of the most crucial factors of the home loan process. Whether fixed or floating, the interest rates on a home loan are constantly discussed among the finance community. One thing that every Indian knows about the home loan interest rates is that they are subjected to change after a specific time period. This article will help you understand the history and the reasoning behind the fluctuations in home loan interest rates.

History of Home Loan Interest Rates in India


When the 70s started, very few Indians knew about the housing finance market. The purchase of properties was simply made by raising money for it. Home-buyers used to be people over forties or older with ample savings to fund their homes. Besides, obtaining a home loan was not as easy as it is today.

On the other hand, buying a property with the help of a home loan has become easier nowadays. Banks and other financial institutions are encouraging more potential buyers by offering attractive interest rates.

Incorporation of MCLR


After 2000, India has experienced massive growth in all sectors. With the development of the IT and finance industries, people in their thirties became financially able to invest in a house by taking home loans. As a result, banks and other loan lenders started offering attractive interest rates to their customers.

Furthermore, the digitalisation helped these generations with self-help tools like home loan EMI calculator and home loan eligibility calculator.

To support this growing number of home-buyers, Reserve Bank of India incorporated the Marginal Cost of funds based Lending Rate (MCLR). MCLR is dependent on the cost of borrowing incurred by banks and Repo rate.


Before incorporation of MCLR, when RBI decreased the Repo rate, it took certain amount of time for benefits to be translated to customers through lower lending rates. However, due to MCLR, it is ensured that the benefits are translated to the end customers. MCLR was introduced to bring transparency in the process through which banks determine home loan interest rates.

The relation between MCLR and Home Loan Interest Rates


The repo rate is the rate at which other banks borrow money from the Reserve Bank of India. It is a tool by which RBI controls the inflation in India. When RBI lowers the Repo rate, the  decreases that brings down the floating interest rates in home loans.

Additional Read: How to find out the right balance between Home Loan EMI and Tenure Period

 

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.

Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.