How Banks Decide Your Home Loan Interest Rate (India Guide)

TL;DR: How Banks Decide Your Home Loan Interest Rate

If you want the short version of how banks decide home loan interest rates in India, here it is.

• Your rate follows a formula: Benchmark Rate + Spread + Risk Premium
• Most new floating home loans are linked to the RBI repo rate through an external benchmark
• Older loans often run on MCLR or even base rate which can be costlier
• Your credit score, income stability, loan amount, LTV, property type and relationship with the bank drive the spread and risk premium
• A small difference of 0.5 to 1.0% on a ₹75 lakh twenty year loan can change your EMI by roughly ₹2,300 to ₹4,700 per month and your total cost by about ₹5.5 to ₹11.4 lakh

Sure reads your actual loan data, compares it with market rates and peer profiles and tells you if your current home loan rate is fair or if you should negotiate or switch.

Why You Should Know How Banks Decide Home Loan Interest Rates

When a bank quotes “8.75%” on your home loan it is not a random number.

Behind that single figure there are three parts:

1. A benchmark rate like repo linked EBLR or MCLR
2. A spread that reflects the bank’s cost and strategy
3. A risk premium that reflects how the bank sees you as a borrower

In simple language:

Final Home Loan Rate = Benchmark + Spread + Risk Premium

If you do not understand this structure you cannot know whether you are overpaying or not and you cannot negotiate effectively.

Why this matters in real money terms

Take a ₹75 lakh home loan for 20 years.

• Borrower A: Interest rate 9.00% → EMI ≈ ₹67,479
• Borrower B: Interest rate 8.00% → EMI ≈ ₹62,733

Difference: about ₹4,746 per month and around ₹11.4 lakh over the full tenure.

Nothing else changed except a 1% difference in the home loan interest rate.

This is why understanding how banks decide home loan interest rates is a core part of smart money management.

Step 1: The Benchmark That Anchors Your Home Loan Rate

The benchmark is the starting point. Everything else is added on top.

Repo linked or external benchmark loans

For most new floating rate home loans, RBI rules require banks to link rates to an external benchmark. In practice the most common one is the RBI repo rate.

Example:

• RBI Repo Rate: 6.50%
• Bank adds its fixed margin to create Repo Linked Lending Rate (RLLR)
• Suppose RLLR is Repo + 2.25% = 8.75%

This 8.75% becomes the benchmark for your loan. Your final rate will be this benchmark plus your individual spread and risk premium.

Key points:

• Changes in repo rate should flow through to your loan at defined reset dates
• Repo linked loans usually show faster and clearer transmission of rate cuts and hikes than MCLR

MCLR linked home loans

Before external benchmarking, banks used MCLR (Marginal Cost of Funds based Lending Rate).

MCLR is based on:

• The bank’s own cost of funds
• Operating costs
• A small margin

MCLR based loans often respond slower to RBI changes compared with repo linked loans.

If you took your home loan some years back there is a good chance you are still on MCLR even if new borrowers at the same bank are on repo linked rates.

Base rate and BPLR home loans

Very old home loans may still be linked to:

• Base rate or
• BPLR (Benchmark Prime Lending Rate)

These are less transparent and usually more expensive in today’s context.

If your loan is still on base rate or BPLR there is almost always a case to review and consider a switch to a modern benchmark and sharper pricing.

Step 2: The Spread That Reflects the Bank’s Strategy

Once the benchmark is set, the bank adds a spread.

This spread pays for:

• Branches, staff and technology
• Regulatory costs and buffers
• Profit margin
• Pricing strategy versus competitors

Example:

• Benchmark (RLLR): 8.75%
• Typical spread for a standard home loan: maybe 0.25% to 0.75%

So the indicative rate becomes:

8.75% + 0.25% = 9.00%

Different banks take different approaches:

• Some banks keep spreads lower to gain market share
• Others maintain higher spreads but are open to negotiation for strong profiles

You cannot change the benchmark but you can influence the spread by having a strong profile and by asking the right questions at the right time.

Step 3: The Risk Premium That Depends on You

This is where two borrowers with the same bank and benchmark end up with different rates.

Credit score bands

Banks usually work with slabs such as:

• 800 and above → best pricing
• 750 to 800 → standard pricing
• 700 to 750 → slightly higher rate
• Below 700 → clearly higher risk premium or even rejection

A small difference in score can mean a 25 to 50 basis point difference in rate.

Loan to value ratio (LTV)

LTV is:

LTV = Loan Amount ÷ Property Value

Higher LTV means you are putting less money from your side and the bank is taking more exposure which is higher risk.

• LTV above 80% can lead to a higher premium
• Lower LTV can help you negotiate a sharper rate

Income stability and employer profile

Banks like:

• Stable salaried income
• Reasonable debt to income ratio
• Recognised employers such as listed companies, PSUs or large MNCs

A stable profile with a clean repayment history often gets better pricing.

Loan amount and tenure

• Larger ticket home loans sometimes get special campaigns or sharper rates
• Very long tenures increase interest rate risk for the bank and may attract a slightly higher premium

Property type and location

The bank also looks at the property:

• Is it in a major city with good resale potential
• Is the project approved and clear from a legal perspective

Riskier properties can lead to higher rates or stricter conditions.

How Banks Decide Your Exact Home Loan Rate: The Internal Flow

Putting it all together, a typical bank flow looks like this.

Step 1: Risk assessment

The bank scores you on:

• Credit history
• Income and stability
• Existing obligations
• Employer and profession
• Banking relationship

This gives your risk bucket.

Step 2: Attach benchmark and base pricing

Based on policy and date of application the bank sets:

• Repo linked benchmark or
• MCLR or
• In older cases base rate or BPLR

It then applies standard pricing for that product.

Step 3: Apply spread and risk premium grid

The bank uses internal grids such as:

• Very strong profile → Benchmark + 0.15%
• Average profile → Benchmark + 0.45%
• Borderline profile → Benchmark + 0.85%

You usually see only the final rate in your sanction letter. The benchmark and spread are not always clearly explained unless you ask.

Step 4: Ongoing review and retention

Over time the bank keeps reviewing its portfolio.

• It may launch special campaigns for new customers
• It may leave existing customers on older spreads unless they request a review
• It may offer you a conversion to a lower spread for a small fee if you ask and if you qualify

This is why regularly checking your home loan interest rate is important. If you do not ask, your rate may never change even if the market has moved.

Signals That Your Home Loan Interest Rate Needs Attention

New customers at your bank get much lower rates

You see an ad that says:

“Home loans from 8.40%”

Your own rate is 9.25%.

This is a red flag.

You should:

• Confirm your benchmark
• Ask your bank to share your current spread and how it compares with the latest grid
• Check if you qualify for a lower slab

Repo rate has moved but your EMI has not

For repo linked loans, changes in repo should show up at the next reset.

If repo has moved and your rate has stayed flat for a long time ask:

• What is my benchmark
• What is my reset frequency
• What spread am I on today

Your rate is far above market offers for your profile

If lenders are offering around 8.40 to 8.60% for a profile like yours and you are paying 9.50%, you are likely overpaying.

In such a case you should evaluate:

• Negotiation with the current bank
• Repricing within the same bank
• A full balance transfer if the savings justify the effort and costs

Common Mistakes People Make With Home Loan Interest Rates

Focusing only on EMI

Banks can reduce EMI by:

• Lowering the rate or
• Extending the tenure

Both reduce EMI but only one saves serious interest cost.

Always ask:

• What is my current ROI
• What is my benchmark and spread
• Has the rate truly reduced or has the tenure just increased

Staying on old benchmarks

Many borrowers are still on base rate or MCLR while new borrowers enjoy repo linked pricing.

If you are on an old benchmark, ask:

• What will be my rate if I shift to repo linked within the same bank
• What are the charges for this conversion
• How does this compare with transferring to a new lender

Not using profile improvement

Over time:

• Your income usually rises
• Your outstanding loan reduces
• Your property value may move up
• Your credit score can improve

This means your risk profile is stronger than on day one yet your loan may still be priced as if you are the same risk.

You should use this to request better pricing.

Assuming big brands always give the best rate

A strong brand is important for safety and service but that does not guarantee the best rate for your specific profile at all times.

Different lenders push different segments at different times. A data based comparison works better than assumptions.

How Sure Helps You Know If Your Rate Is Fair

Sure was built to answer a simple question for every borrower:

“Am I paying the right interest rate on my loans”

Rate benchmarking based on your real data

When you download the Sure app, enter your mobile number and give a consent OTP:

• Sure instantly reads your loan data from your credit bureau pull
• It benchmarks your rate against current market data and peer profiles
• It highlights whether you are in a fair band or clearly overpaying

You get a clear picture instead of guesswork.

Clear view of “switch worthiness”

Sure goes beyond listing cheaper lenders.

You see:

• How far your current rate is from what you could reasonably get
• Whether a negotiation with your existing bank is enough
• Whether a full refinance makes sense after adding all charges

The app summarises this as monthly and total savings across the remaining tenure.

Action oriented guidance

Sure provides:

• A simple explanation of what is happening with your loan
• Guidance on what to ask your bank
• Help in deciding between staying, repricing or switching

The aim is simple. If your profile deserves a better rate, you should not lose money just because the pricing grid is hidden behind jargon.

FAQs: How Banks Decide Home Loan Interest Rates in India

Is my home loan interest rate negotiable

In many cases yes. If your credit score, income or overall profile has improved or if market rates have fallen you can request a better rate.

Some banks may charge a small fee to reduce the spread. You should still evaluate the total savings to see if the change is worth it.

How often can the bank change my rate

For floating rate loans banks revise rates according to the benchmark reset frequency mentioned in your agreement usually monthly or quarterly.

The benchmark moves with repo or MCLR. The spread usually changes only when there is an explicit repricing or conversion.

Are repo linked home loans always better than MCLR loans

Repo linked loans usually pass on policy rate changes more quickly and transparently.

However you should still compare:

• Your current effective rate
• Available repo linked offers
• Costs involved in converting or switching

What matters is the final rate you pay not just the label.

Can the bank increase my spread later

Banks work under board approved policies. They do not normally increase the contracted spread arbitrarily for existing loans.

What often happens is that new customers are offered lower spreads while older customers continue on earlier spreads unless they ask for a review.

When should I consider a home loan balance transfer

A balance transfer is worth exploring when:

• Your rate is at least 0.5 to 1.0% higher than what you can get today
• You have seven to ten years or more left on the loan
• The processing fees and other costs are small relative to the expected savings

Sure can help you run this math in a simple way without setting up multiple spreadsheets.

What You Should Do Next

To summarise how banks decide home loan interest rates in India:

• Your rate is a combination of a benchmark, a spread and a risk premium
• The benchmark is driven by RBI and bank policy
• The spread and risk premium are driven by your profile and by how actively you manage your loan
• Small changes in rate can translate into lakhs of rupees over the life of the loan

Instead of hoping you got a good deal, you can use data to verify it.

Simple next steps

1. Download the Sure app
2. Enter your mobile number and provide the consent OTP
3. Instantly see all your loans analysed in seconds
4. Check whether your current home loan interest rate is fair for your profile
5. Get a clear plan to negotiate or switch and understand the savings involved

You put a lot of effort into buying your home. It is worth spending a few seconds to make sure you are not silently overpaying on the loan that funds it.