Mint Explainer | SBI hikes home loan rates in a low-rate cycle—what does it mean?
State Bank of India’s decision to raise home loan rates in the middle of a neutral interest-rate cycle marks a shift in the housing loan market. The move could ease pressure on bank margins, reset pricing discipline among PSU and private lenders, and raise borrowing costs for new home buyers.
MUMBAI: The country’s largest lender, State Bank of India (SBI), and fellow public sector major Union Bank of India have raised home loan interest rates by 10–25 basis points, even as the broader interest rate cycle remains neutral. The move comes at a time when PSU banks continue to see steady growth in housing loans, despite a slowdown in overall sectoral credit growth.
SBI’s hike follows the Reserve Bank of India’s (RBI) decision to hold rates steady at its last monetary policy meeting on 6 August.
Mint looks at what this means for borrowers and whether other lenders are likely to follow.
How much have home loan rates been raised?
SBI has increased the upper band of its term home loan rates by 25 basis points (bps), according to Economic Times. Effective 1 August, rates on term home loans are now in the range of 7.50-8.70%, compared with 7.45-8.45% in July and 8.0–8.95% in May.
Earlier, Union Bank raised its base home loan rate by 10 bps from 7.35%, taking the band to 7.4-10% from 7 July.
How are lending rates calculated?
Rates charged by banks on floating loans to retail customers and MSMEs, including home loans, must be linked to an external benchmark, typically the policy repo rate. The external benchmark-linked lending rate (EBLR) is the sum of the repo rate and the loan spread charged by the bank, usually in the 2-4% range.
Following the RBI’s 50 basis points (bps) rate cut in June, SBI revised its EBLR to 8.15% from 15 June, while Union Bank set it at 8.25% from 7 July.
The final lending rate also includes two other components: the Credit Risk Premium and the Business Strategy Premium. These account for borrower creditworthiness, macroeconomic conditions, sectoral trends, and the lender’s overall financials. They also allow banks to offer discounts to borrowers with high credit scores. Some lenders offer special schemes for women or for joint borrowers.
As with other secured loans, home loan pricing also depends on the loan-to-value (LTV) ratio, which defines the portion of a property’s value a bank will finance. According to Union Bank’s website, home loans up to ₹30 lakh carry an LTV ratio of 90% (10% borrower margin). Loans of ₹30-75 lakh require a 20% margin, and those above ₹75 lakh require 25%.
How have lenders been pricing home loans?
For several quarters, private banks have complained that state-owned peers were pricing home loans aggressively, sometimes “irrationally", at very thin margins, leaving little scope for private lenders to grow.
With muted demand from corporates, bank lending in the past two years has been driven by retail credit. PSU banks, backed by stronger credit-deposit ratios, lower risk appetite, and easier access to capital, have leaned heavily into secured products such as home loans. Private banks, in contrast, have focused more on unsecured segments such as personal, consumer, and MSME loans.
On HDFC Bank’s Q1 earnings call, CFO Srinivasan Vaidyanathan said the bank was deliberately going slower on mortgage disbursals given “fine pricing" by PSUs.
“When there are certain institutions, particularly on the public sector side, which have a rate of anywhere 7.1-7.3% or thereabouts, we are not competing at those kind of rates. We are more looking at rates which are 50-80 bps more than that," he had said, adding that the bank is “okay" growing the book slower, since its focus was on building multi-product relationships with customers.
Currently, Punjab National Bank (PNB), Bank of Baroda, and Canara Bank offer starting home loan rates of 7.40-7.45%, while large private-sector lenders such as HDFC Bank and ICICI Bank start at 7.90% and 7.70%, respectively.
According to RBI data, housing loans grew 9.6% year-on-year in June, a sharp slowdown from 36.3% growth in the year-earlier period. In the current financial year (as of 27 June), housing loan growth was just 1.9% year-on-year, down from 2.9% in the same period last year.
Why are home loan rates being raised now?
Aggressive pricing by PSU banks to grow their loan books has eaten into margins, given that home loans account for a significant share of retail portfolios. Successive RBI rate cuts have added pressure by repricing loans faster than deposits. Net interest margins (NIMs) at most large banks, both PSU and private, fell 11-35 bps sequentially in Q1 of this fiscal year.
The RBI has cut the repo rate by 100 bps since February 2025 across three consecutive policies, bringing it down to 5.5%.
While the central bank held rates steady in August with a neutral stance, SBI and Union Bank’s hikes suggest banks are trying to ease pressure on margins until deposit rates catch up with lending rates over the next three to six months, according to industry experts. Several economists expect another 25 bps repo cut in October or December, given the recent benign inflation data.
Some experts say the hikes could also be linked to broader eligibility criteria. SBI and others may be expanding into riskier borrower segments with lower credit scores to grow their customer base. Such borrowers typically face higher interest rates, justifying a lift at the upper end of the band.
How will borrowers be affected?
The hike applies only to new borrowers; existing borrowers are largely unaffected. For new customers, higher rates mean bigger EMIs or longer repayment tenures.
Since SBI has raised only the upper band of rates, the hike will mostly affect lower credit score borrowers. Because home loans are benchmark-linked, lenders rely on repayment history and creditworthiness to decide rates. The hike may also signal that lenders are witnessing a rise in early-stage delinquencies among lower credit score borrowers, prompting them to raise the risk premium.
Will other lenders follow?
In all likelihood, yes. As the country’s largest lender, SBI sets the tone for the sector. Other PSU and private banks typically align their pricing with SBI, subject to their own portfolio needs.
PNB and Bank of Baroda, which have been particularly aggressive, may raise rates, if not by the full 25 bps. For private banks, SBI’s move provides breathing room to raise yields on mortgages and expand their housing loan books.
Kotak Bank deputy MD Shanti Ekambaram said in the Q1 earnings call that home loan pricing remains “irrational" at times, but still represents an important product. “While the pricing may be competitive for those specific customer segments, we continue to grow the home loan business because it is very sticky," she had said, adding that home loans have helped improve stickiness of small as well as large clients and the bank will continue to focus on the segment with “reasonable seriousness".
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