How do Banks Calculate Home Loan Interest Rates in India? | Kotak Mahindra Bank - Home Loan Stories

10 MAY, 2022

When you apply for a home loan, the lender charges you interest in return for financing your home. This home loan interest rate can be thought of as the cost of borrowing or the cost of the loan. You pay this interest over the tenure of the loan along with the principal that you borrowed through the way of Equated Monthly Installments (EMIs). The home loan interest rate is calculated based on several factors and understanding them can be helpful before you apply for a home loan. These factors include:

  • Repo rate: One of the primary factors based on which the home loan interest rate is calculated is the benchmark rate set by the central bank of the country, the Reserve Bank of India (RBI). This benchmark rate is called the repo rate and banks charge an additional rate on that to arrive at the home loan interest rate. While banks are free to choose the external benchmark rate for calculating the home loan interest rate, most banks tend to use the repo rate as the benchmark.

  • Credit score: When you apply for a home loan, the bank will always look at your credit score that is provided by credit rating agencies such as CIBIL. This lets the bank know of your creditworthiness and assess whether you are a high-risk borrower or not. The higher your credit score, the better the home loan interest rate you can get. Your credit score is based on your payment history, credit length, total level of debt, etc.

  • Type of interest rate: When you apply for a home loan, there are two types of interest rates – fixed and floating. A fixed interest rate remains constant throughout the tenure of the loan while a floating interest rate changes with the market interest rate. So, your EMIs in the latter will tend to change and there is a higher risk. However, banks tend to offer lower rates in the case of a floating interest rate.

  • Loan tenure: The tenure of your home loan could also impact the home loan interest rate. Typically, for longer loan tenures, the home loan interest rate tends to be lower compared to loans with short tenures. This, however, may not always be the case.

While these are the primary factors that go into calculating the home loan interest rate by banks in India, there can also be additional factors. For instance, your relationship with your bank could also help you get a lower interest rate or better loan terms. Banks tend to have discounted interest rates for customers of different categories. You can make use of a home loan calculator online to get an idea of the housing loan interest rate that you would be eligible for by entering basic details. Using a home loan calculator will give you an approximate idea of the cost of borrowing and this could help you plan your home buying budget and also your finances.

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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.