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A lower interest rate also means higher eligibility for the borrower. Photo: Mint
A lower interest rate also means higher eligibility for the borrower. Photo: Mint

Home loan rates of public sector banks turn attractive

  • Interest rates on home loans have been falling since the Reserve Bank of India started reducing policy rates to revive the economy.

Starting 1 July 2020, the State Bank of India is offering home loans starting at 6.95%. This will be the second-lowest rate for home loans after Bank of Baroda, which offers home loans from 6.85% onwards.

In the second week of June, the country's largest bank had announced a reduction in its external benchmark linked lending rate to 6.65% from 7.05%. The bank had also reduced the marginal cost of funds-based lending rate (MCLR) to 7% from 7.25%.

The interest rates on home loans have been falling since the Reserve Bank of India (RBI) started reducing policy rates to revive the economy that has taken a beating due to the lockdown. In its last monetary policy meeting, the central bank reduced the repo rate by 40 basis points (bps) to 4% and reduced the reverse repo rates by 40 bps to 3.35%. One basis point is one-hundredth of a percentage point.

Following the policy rate cuts, the rates for new home loan customers have been falling. "The sub-7% is the lowest interest rate on floating home loan in the last two decades," said Gaurav Gupta, chief executive officer, Myloancare, a marketplace for loans and credit cards.

Even though SBI rates start at 6.95%, the actual rates vary depending on the loan amount and profile of the borrower. For salaried, the interest rate is 7% for loans up to 30 lakh. For loans between 30 lakh and 75 lakh, the rate is 7.25% and 7.35% for loans above 75 lakh. Female salaried borrowers with high credit score get home loans at 6.95%.

The home loan segment is very competitive. In the past, interest rates of private and government lenders were similar. But since the lockdown started, private lenders have not been aggressive as the transactions are slow, according to intermediaries.

For salaried, home loans from ICICI Bank start at 7.45% (for up 35 lakh) and go up to 8.45% (for loans above 75 lakh). HDFC Ltd's home loan interest rates start at 7.35%.

Eligibility and EMIs

Cheaper rates from public sector banks mean lower equated monthly instalments (EMIs) or increase in eligibility. Assume a borrower takes 25 lakh loan from SBI for 20 years. A private lender is charging 50 basis point higher. The EMI for the loan from SBI at 6.95% rate will be 19,308, and from the private lender, it would be 20,064. The borrower will also end up paying 1.81 lakh more in interest for a loan from a private lender.

A lower interest rate also means higher eligibility for the borrower. A person earning 45,000 income would be eligible for a loan of 25.23 lakh at an interest rate of 7.45%. If the interest rate drops by 50 bps, the person's eligibility could increase by almost 1 lakh. The eligibility criteria, however, differ from one lending institution to another, and many other factors determine it. This is just an illustration to show how eligibility can change if everything else is the same.

However, don't choose a lender on the interest rate alone. There is a higher scope of negotiation with private lenders. They could also be faster in disbursing the loan than public sector banks.

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