How Lenders Decide The Home Loan Interest Rate?

For many, buying a home is not just another form of investment, but a dream of a lifetime. You often need financial security in form of housing loan to achieve this dream.

There are many financial institutions each with a number of schemes under their portfolio to offer different customized Housing Loan interest rates to customers depending on one’s requirement.

In such a scenario it is obvious to be confused to finalize the best plan for a place you will call yours.

Hence, we provide you a one-stop platform to clear all your queries regarding the housing loan interest rate so that you can make the right decision and move ahead.

Let us first begin with getting to understand basic terminologies which determine interest rates levied by banks:

Cash Reserve Ratio (CRR)

As the name suggests, is a minimum reserve that every bank has to maintain from the total deposit it has received from its customers. RBI decides on this rate and all banks need to abide by this. This is for the depositor’s protection. On the flip side, higher CRR will relate to higher interest rates on loan as the liquidity in the system reduces.

Repo Rate (RR) & Reverse Repo Rate (RRR)

RR is the rate of interest levied by the Reserve Bank of India while lending money to another bank and RRR is the interest rate that the RBI pays while it borrows money from another bank. RR is always higher than RRR. Increasing RR helps keep inflation under check, whereas reducing RRR can induce the excess of liquidity in the system. In short, they are critical for determining Interest rates of banks as high RR results in higher interest rates.

Lending Rates: (PLR, BPLR, BR & MCLR)

The interest rate that a bank levy on its customers is determined by its lending rate. Earlier banks used to charge Interest rates on the bases of PLR (Primary Lending Rate) and BPLR (Benchmark Primary Lending Rate). Later, this system was replaced by BR (Base Rate) in 2010 as it was observed banks were relaxing the lending rates for few special customers and charging retails customers with higher interest rates. Since 2016 MCLR (Marginal Cost of funds based Lending Rate) has been made compulsory by RBI for all Banks. MCLR equips bank with a better framework to implement transmission of policy rate into lending rates with higher transparency in the system.

Statutory Liquidity Ratio: (SLR)

As per RBI policy, each loan provider has to maintain a reserve in the form of government securities and gold before it can start giving credit to customers. This is called Statutory Liquidity Ratio.

Further interest rates are also determined on individual customer’s credit rating or CIBIL score. Special considerations are given to women with a difference of 0.05 to 0.10% in interest rates to promote and empower women in our country.

Hacks to Reduce Interest Rates on Home Loans

Switch to MCLR: In case you have taken Home Loan before 1st April 2016. Interest rates on MCLR are always more attractive than base rates. However, one needs to pay a nominal fee (~5k to 20k) to make this switch.

Pre-Payments or Increasing EMI Amount: Suppose you have taken a loan of 20 lakhs for 20 years. This will translate into an interest amount of around 10 to 20 lakhs. These figures are not accurate and depend on the interest rates. You can calculate the exact amount for your loan amount using Home Loan EMI Calculator. Making regular prepayments (especially at the beginning of the term period) or increasing EMI by a couple of thousand can significantly reduce the interest part of the loan.

Transfer Loan: You can always opt for transferring the loan from one bank to another that offers a lower interest rate. But before making this move, you must be aware of the transfer charges charged by both existing and new bank to avoid last minute surprises.

The Bottom Line

Even a small difference in the interest rate for a long period of time can make a huge difference in the total interest payable.

Since it is a long-term commitment, you should always opt for a Home Loan with all prerequisites and options in hand for a smart and confident choice.

Article Posted By : pardeepsharmalView All Articles

Pardeep is an experienced financial analyst, researcher & writer. He has done MBA in Finance. He has worked extensively in the finance sector along with many organizations. He spends most of their time on the Internet reading finance related stuff and love to share my expertise.

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Keywords :

home loan , home loan interest rate


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