Home Loan Interest Rate In India

Getting a home loan is a major financial decision and understanding the housing loan interest rate is crucial before making a choice. It directly impacts your repayment amount and monthly budget. Stay updated on interest rates, rate types, and key factors to help you choose a home loan aligned with your financial goals. Bajaj Markets, a digital marketplace for financial services, offers access to housing loans from multiple lending partners, with interest rates starting from 8.50% p.a.

Here is a list of the current home loan interest rates, maximum loan amounts, and tenures offered by lenders that have partnered with Bajaj Markets:

The interest on your home loan depends on three main things such as the loan amount, the interest rate, and the loan tenure. While a basic formula can help estimate the total interest, most home loans in India are repaid through monthly instalments (EMIs), not simple interest.

 

Here is a basic way to understand interest using the simple interest formula:

 

Simple Interest = (Loan Amount × Interest Rate × Tenure) / 100

 

For example, you take a home loan of ₹50 Lakhs at an interest rate of 8.50% per annum for a tenure of 20 years. The total interest can be estimated using the simple interest formula:

 

                          Interest = (50,00,000 × 8.50 × 20) / 100 

 

                                         = ₹85,00,000   

               

This gives you a rough idea of the total interest over the loan period. However, actual loan repayments are calculated using the EMI method, which works on compound interest and reduces your principal balance with every payment.

What is the EMI Formula

For most home loans, banks and lenders use this formula to calculate EMIs: 

EMI = [P × r × (1 + r)n] ÷ [(1 + r)n – 1]

Where:

• P is the loan amount

• r is the monthly interest rate (annual rate / 12 / 100)

• n is the total number of EMIs (loan tenure in months)

   

This formula gives you your fixed monthly payment, which includes both interest component and principal amount.

How Do Lenders Decide Your Interest Rate

The interest rate you get on a home loan is not random. It is calculated using a standard method set by the Reserve Bank of India (RBI), which banks and lenders follow.

Before 2016: Base Rate System

Until 2016, banks used a method called the Base Rate System. In this system:

• The base rate was the minimum rate set by the bank, influenced by RBI policies and the bank’s cost of funds

• A markup or spread was added to the base rate, depending on the loan type and your credit profile

   

Interest Rate = Base Rate + Markup

So, if the base rate was 9% and the markup for your loan was 0.50%, your final interest rate would be 9.50% p.a.

 

However, this system lacked transparency and didn’t always reflect changes in the RBI’s policy rates quickly.

After 2016: MCLR System

To make interest rate calculation more transparent and responsive to market changes, the RBI introduced the MCLR (Marginal Cost of Funds Based Lending Rate) in April 2016.

 

MCLR is calculated using this formula:

MCLR = Marginal Cost of Funds + Negative Carry on CRR + Operating Costs + Tenure Premium

Here’s what these terms mean:

• Marginal Cost of Funds: The cost a bank pays to borrow money (like interest on deposits)

• Negative Carry on CRR: A cost banks bear because they must keep a portion of funds with the RBI without earning interest

• Operating Costs: Day-to-day expenses of running banking operations

• Tenure Premium: Extra cost charged for long-term loans due to higher risk

 

Once the bank calculates its MCLR, it adds a markup based on your loan type and creditworthiness. This gives you the final interest rate.

 

Final Interest Rate = MCLR + Markup

If you choose a floating interest rate, your rate can change over time. MCLR is reviewed by banks every month or quarter, so your rate may increase or decrease depending on the market.

When you apply for a home loan, you’ll need to choose between two types of interest rates: fixed and floating. Each comes with its own pros and cons, depending on your financial goals and risk appetite.

Fixed Interest Rate

In a fixed rate loan, the interest rate stays the same throughout the loan tenure. It is set at the time of loan sanction and does not change, regardless of market conditions.

Key Benefits:

• Your EMI remains constant, making it easier to plan monthly expenses

• Brings financial stability and predictability, especially over a long tenure

• Suitable for people who prefer low risk and want clarity in repayment planning

   

However, fixed rates are usually slightly higher than floating rates. Also, you may miss out on any benefits if market interest rates fall in the future.

Floating Interest Rate

A floating rate changes from time to time. It is linked to a benchmark like the repo rate or MCLR, which are influenced by RBI policies and other economic factors. So, your EMI can go up or down based on market movements.

Key Benefits:

• Floating rates are usually lower than fixed rates at the start

• If the benchmark rate falls, you may pay less interest, which can reduce your EMIs

• You could save more over time, especially during periods of falling rates

   

However, the rate may rise during inflation or economic slowdowns, increasing your EMI. It’s better suited for borrowers who can manage some level of risk and are comfortable with market-linked changes.

 

Most lenders allow you to switch between fixed and floating rates during your loan tenure. A small fee may apply for this switch. Choosing the right time to shift can help you reduce your overall interest cost and manage your repayments better. It’s a good idea to discuss this option with your lender based on market trends and your financial situation.

Choosing between a fixed or floating interest rate can significantly impact your total loan cost and monthly budget. Here is a comparison to help you understand the key differences between the two options:

Getting a better interest rate on your home loan could save you lakhs over the loan’s lifetime. Here are the key factors that lenders consider before deciding your interest rate:

Credit Score

Your credit score reflects your repayment history and overall creditworthiness. A higher score (typically 750 and above) can help you secure lower interest rates, while a lower score may lead to higher rates or limited loan options.

Income and Employment Stability

Lenders prefer borrowers with stable and regular income. Salaried professionals working with reputed organisations or government departments often get better interest rates compared to self-employed individuals with inconsistent earnings.

Loan Amount and Tenure

The size of your loan and the repayment period influence the interest rate. Generally, higher loan amounts or longer tenures may carry slightly higher rates due to the increased risk to the lender.

Type of Interest Rate Chosen

Whether you opt for a fixed or floating interest rate also affects your cost of borrowing. Fixed rates offer stability but tend to be slightly higher, while floating rates can be lower initially but vary with market conditions.

Property Type and Location

The age, type, and location of the property you wish to finance play a role. Properties in well-developed or high-demand areas are considered lower risk and may fetch better interest terms.

Loan-to-Value (LTV) Ratio

The LTV ratio is the percentage of the property’s value that the lender agrees to finance. A lower LTV ratio (meaning you pay a higher down payment) usually results in more favourable interest rates.

Co-applicant Profile

Adding a financially strong co-applicant can boost your overall loan eligibility. If the co-applicant has a good credit score and stable income, lenders may offer a better rate.

Even a small reduction in your home loan interest rate can lead to significant savings over time. Here are some effective ways to help lower your home loan interest burden:

Maintain a High Credit Score

A strong credit score (750 or above) reflects good repayment behaviour and improves your chances of getting a lower interest rate. Regularly checking your score and addressing any errors can also make a positive difference.

Opt for a Shorter Loan Tenure

Choosing a shorter repayment period reduces the overall interest paid, even if your EMIs are slightly higher. If financially feasible, a shorter tenure can be more cost-effective in the long run.

Make Regular Prepayments

If your loan agreement allows, try making part-prepayments whenever you have extra funds. This helps reduce the outstanding principal and the total interest outgo over time.

Request a Rate Reduction with Your Lender

If your financial profile has improved since you took the loan (better credit score, higher income, etc.), you can approach your lender for a lower rate. Some banks allow you to shift to a lower rate slab by paying a nominal fee.

Consider a Home Loan Balance Transfer

If another lender offers a lower interest rate, you can transfer your outstanding loan amount to them. This option is useful when the interest rate gap is significant, and the cost of transfer is justified.

Choose a Floating Rate When Rates Are Falling

During periods of falling interest rates, opting for a floating rate can help you benefit from market-linked rate reductions. Keep an eye on the repo rate and market trends to decide the right time to switch.

Getting a favourable home loan interest rate can make a big difference in your long-term financial planning. Here are some practical steps you can take to secure the best possible rate:

Check and Improve Your Credit Score

Lenders usually offer the lowest rates to applicants with high credit scores, typically above 750. Make timely repayments, reduce credit card balances, and avoid frequent loan applications to maintain a healthy score.

Compare Offers from Multiple Lenders

Don’t settle for the first offer. Use online marketplaces or visit different banks to compare home loan rates, processing fees, and overall loan terms before deciding.

Apply with a Co-applicant

Including a co-applicant with a stable income and good credit score can improve your loan eligibility. This may increase your chances of getting a better rate.

Opt for a Higher Down Payment

If you can afford it, pay a larger share of the property’s value upfront. A lower loan-to-value (LTV) ratio reduces the lender’s risk, which may translate into a better rate.

Select the Right Interest Type

Understand the pros and cons of fixed and floating interest rates. Choose one based on current market trends and your financial comfort with changing EMIs.

Maintain Stable Employment and Income

Lenders favour applicants with a steady job history and reliable income. If you work with a reputed organisation or have a consistent business income, you may be eligible for better terms.

Negotiate with the Lender

Once you have compared options and built a strong application, don’t hesitate to negotiate. Lenders may be open to offering a better rate, especially to well-qualified borrowers.