Understanding what drives Home Loan Interest Rates - Kotak Bank

13 AUGUST, 2019

Purchasing a house is one of the most important moments of life, personally and financially. A property purchase involves a large monetary transaction and most people hesitate to invest a bulk of their savings, and rightly so. Home loans bring you closer to your dream of owning a home. As a result, majority of us often prefer taking a home loan. Thanks to the many banks and financial institutions, quick home loans and benefits that come along with them are available for potential home buyers.
One needs to understand essential things required to get a home loan before applying for one. From the down payment to interest rates, there are many things to study to get a suitable loan. To make sure you choose the best home plan for your needs, the first step is to understand home loan interest rates and how they are determined. Here is a ready guide that will help you to understand what drives home loan interest rates.

Factors influencing interest rates


The interest rates on any home loan are highly influenced by the economic condition of that particular country. There are many factors such as inflation rate, global financial standing and money supply that affect the interest rate. In India, the interest rates on all loans are governed by Reserve Bank of India (RBI) with the help of different metrics like Repo Rate, Statutory Liquidity Ratio and Cash Reserve Ratio.

After April 2016, RBI incorporated a new scale called Marginal Cost of Fund Based Lending Rate (MCLR). MCLR was established to further increase transparency in the way interest rates were calculated. MCLR also gives the assurance of a well-organised transmission of cut in the interest rates on loans. Every home-loan approved by banks after April ‘16 follows MCLR.

Furthermore, after April ‘16, all loans are provided at a Spread-over MCLR. For example, if MCLR of a particular bank is at 9% and  the Spread is 0.50% then the final home loan interest rate be 9.5% p.a. MCLR is subjected to fluctuations, whereas Spread remains constant over the entire tenure period of your loan. Fluctuations in MCLR are based on the type of MCLR i.e. in case of 6 month MCLR, MCLR remains constant for 6 months and then gets reset basis the prevailing rate or in case of 1 year MCLR, MCLR remains constant for 1 year and then gets reset basis the prevailing rate

It is essential to have insights on the way interest rate cycle works before getting a loan with longer or shorter duration reset of MCLR. Only banks are bound to MCLR, whereas other home loan lenders have their own interest rates based on Prime Lending Rate (PLR).

Types of Interest rates


There are two main types of interest rates on all kinds of home loans,

  • Fixed Interest rate, where the instalment amount to be paid and the tenure of the loan is fixed.
  • Floating Interest Rate, where the interest rate changes with time.

The reset period, Spread and value of MCLR will be the deciding component of interest rates after incorporation of MCLR. You can use a home loan EMI calculator to get an idea on your monthly instalments on home loan before applying for it.

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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.