How Are Home Loan Interest Rates Determined In India

home loan interest rates

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The interest rate on home loans is never constant; it varies not only from bank to bank but also from person to person. Everyone knows that a slight increase or decrease in the interest rate of a home loan can result in a drastic increase or decrease in the overall repayment of the home loan. Other than these two factors, there are many more that affects the interest rate.

So, what are the factors that cause a change in the interest rate?

Benchmark Prime Lending Rate (BPLR): It is the rate of interest at which commercial bank lends money to its customers. The banks often used to offer loans at low interest rates, so the RBI replaced the BPLR. After this, no bank can provide a loan below the BPLR. This has a direct impact on the interest rate that a bank offers to its customers.

Higher BPLR = Higher interest rate

Prime Lending Rate (PLR): It is the reference rate of interest used by the bank or NBFCs to assess the interest rate on various products. Most of the NBFCs offer a discount on PLR rate.

PLR – 5%

Therefore, if the PLR of a specific bank is 14%, the interest rate for their housing loan would be 9%

Statutory Liquidity Ratio (SLR): It is the reserve that commercial banks need to maintain. These must be assets that can be easily converted into cash such as treasury bills, govt-approved securities, gold, government bonds, cash reserves, and treasury bills. It also comprises of securities, eligible under Market Borrowing Programmes and Market Stabilization Schemes.

The bank can only offer credit to its customer after meeting the SLR requirement.

Cash Reserve Ratio (CRR): It is the minimum percentage of the total deposit made by the customer that the bank holds as a reserve. It can either be in the form of cash or as deposits with the RBI.

Higher CRR = Higher rate of Interest (This is because higher CRR reduces the amount of liquidity in the system)

Repo Rate: Reserve Bank of India lends money to other banks at a specific rate of interest, which is known as the Repo rate.

Lesser Repo rate = Lesser rate of interest.

It is quite evident that if the banks are getting their loan at a lesser rate of interest, then they will also offer loans at a lower rate to their customers.

Reverse Repo Rate: It is the opposite of the “Repo rate.” In this case, the banks give loans to the Reserve Bank of India at this rate. The banks are more than happy to lend Reserve Bank of India money at a higher Reverse Repo Rate because then the bank will gain attractive profits. However, this is also good for the bank’s customers as they will get the loan at lower interest rates.

Simple tips to reduce your home loan interest rate

Higher down payment: One can always make a higher down payment while obtaining the home loan will reduce the principal amount. In simple words, a lower principal amount means lower EMI payments and lower interest rates.

Home loan prepayment: If your bank or lender has the option of prepayment for the provided home loan, then it can reduce the overall interest payments. However, banks may charge a prepayment penalty fee for such an allowance.

Extra EMI payment: If you have some savings or maybe if you receive any sort bonus from your job, then you can use it to pay an extra EMI not only to save interest but also to repay the home loan quickly.

Additional Reading:- What makes a loan against property different from a home loan? 

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