What Factors Decide Your Home Loan Interest Rate?

All of us opt for a home loan at some point in life. Making a home is a dream-come-true moment for us. However, funding is always a concern. Even if we are very thorough and particular about the savings, we never know when and how the real estate market can become volatile, and we need to arrange more money.

The demand for home loans is high in the Indian market, and the Mordor Intelligence data says:

• In 2025, the home loan market in India is valued at USD 379.72 billion. 
• The market is expected to grow at a CAGR of 15.06% during the 2025-30 period. 
• By 2030, the market will reach USD 765.73 billion.

While the public sector banks still offer the majority of home loans in the country, the private banks and non-banking financial companies are growing in strength in the home loan landscape. The factors affecting home loan interest in these organizations are different. 

So, often we are confused about the actual financial burden of taking a home loan. We don’t want to get trapped in repaying high interest rates and debt cycles in the process. 

In this article, I will discuss what the home loan interest means and the factors affecting home loan interest.

What Is A Home Loan Interest Rate? 

You may find this question basic, but I have found that most of us have a very vague idea about what a home loan interest rate is. In simple words, a home loan interest rate is the cost you pay for borrowing money to buy a home.

Let’s decode it further. 

• Suppose you take an X amount of a home loan from an organization. That is your principal loan amount.

• Now, the organization will charge a certain percentage of the principal loan amount as interest. The interest is usually calculated on a per annum basis. 

• Then, the amount is divided into EMIS or easy monthly installment schemes. So, the interest rate on your home loan determines how much you will pay the lender each month. 

Now, the home loan interest rate depends on many factors. For example, if you are a salaried employee and your friend is a self-employed professional, the interest rate will be different. 

Similarly, some organizations charge fixed and consistent interest rates, while many organizations charge floating interest rates. The latter is, of course, difficult to manage. 

Furthermore, some organizations offer a lower home loan interest rate for male borrowers. That is one of the main reasons why Republic World has reported a 23% year-on-year disbursal growth rate for women as compared to only 14% for men borrowers. 

What Are The Factors Affecting Home Loan Interest? 

Are you managing your credit well? This is a major factor impacting the home loan interest rate. Do you know what the other factors are? 

Here are the details. 

1. Your Credit Score And Credit History

Your credit score is the most influential factor. A score above 750 signals that you manage debt responsibly, which encourages lenders to offer lower rates. 

A poor score, on the other hand, suggests a higher risk, leading to either rejection or a higher interest rate. Do you know what the factors are that impact your credit history and score?

• Timely Payments
• Low Credit Utilization
• The Length of Credit History
• How You Mix Your Credit
• New Credits You Apply for

2. Your Income And Employment Stability

Lenders assess whether you have a steady income to repay the loan comfortably. 

• If you are a salaried individual with a permanent position in a reputable company, you will get better rates. However, the ones in the early stage of employment or in contractual roles will have higher interest rates to pay. 

• If you are self-employed, you will need to demonstrate consistent earnings through income tax returns and financial statements spanning at least two years.

3. Loan Amount And Property Value

The loan-to-value (LTV) ratio plays a key role. 

Suppose you are borrowing 90% of the property value, and your friend is borrowing 70% of the property value. You will have to pay a higher interest rate, and the lender will consider it riskier. 

A larger down payment reduces the LTV ratio and can help you secure a lower interest rate. Additionally, higher loan amounts may attract different rate structures than smaller loans.

4. Loan Tenure You Choose

Shorter tenures often come with slightly lower interest rates because the lender’s risk exposure is less. A 10-year loan might have a marginally better rate than a 25-year loan. 

However, shorter tenures also mean higher EMIs, so balance the rate benefit against your monthly repayment capacity.

5. Type Of Interest Rate

Fixed interest rates remain constant throughout the loan tenure, providing stability but often starting higher than floating rates. 

Floating rates fluctuate based on market conditions and the lender’s benchmark rate. Whilst floating rates can decrease, they can also rise, affecting your EMI. Your choice impacts both predictability and cost.

6. Property Type And Location

Lenders consider the property you’re buying. Ready-to-move homes in established areas with clear titles often attract better rates than under-construction projects or properties in remote locations. 

The property’s resale value matters because it serves as collateral. Lenders prefer properties in locations with strong demand and legal clarity.

7. Your Age And Remaining Service Years

It’s obvious, and that’s why we all want to own a home before turning 40. The younger the age, the longer the service tenure the borrower has left. That is why lenders prefer younger borrowers over those nearing retirement. 

Considering a borrower nearing retirement has a shorter tenure to repay their loans, the lending organizations often charge a higher interest rate. 

8. Your Existing Relationship With The Lender

Existing customers with savings accounts, fixed deposits, or other products with the lender may receive preferential rates. Lenders often reward loyalty and established trust with rate discounts or processing fee waivers. If you have a strong banking relationship, it’s worth negotiating for better terms.

9. Market Conditions And Benchmark Rates

Home loan rates are linked to external benchmarks like the repo rate set by the Reserve Bank of India. This is more crucial if you have taken a home loan with a floating interest rate. 

The floating interest rate of your home loan changes with the change in the repo rate. The broader economic conditions that impact the home loan interest rate are: 

• Inflation
• Liquidity

Summarizing The Factors Affecting Home Loan Interest 

Your home loan interest rate depends on your credit score, income stability, loan amount, property type, tenure, and prevailing market conditions. 

Improving your credit profile, increasing your down payment, and choosing the right property can help you secure more competitive rates and save significantly over the life of your loan.

I hope you make all the right financial decisions, aiding your dream of having a beautiful home.