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How a Home Loan Works

  • A home loan is sanctioned based on the applicant’s income, credit score and repayment capacity.
  • The property’s value and legal status is also considered while approving the home loan.
  • The lender, usually, approves up to 75 to 90% of the property value as loan.
  • The interest is charged as fixed or floating type as chosen at the time of application.
  • Once the loan is sanctioned, it is disbursed in full or in parts, depending on whether the property is ready or under construction.
  • The loan has to be repaid through EMIs comprising of the principal and the interest component.
  • The property documents remain with the lender till the loan is repaid in full.
  • Once the loan is repaid, the lender closes the loan account and hands over the property document and loan closure documents.
  • A successful closure of home loan helps improve the credit score significantly.
  • Best Loan Deals – Personalised offers from 30+ lenders
  • Balance Transfer Facility – Transfer the loan to a lender providing lower rates
  • Overdraft Loan Facility – Pay interest only on the funds utilised
  • Customer Support – End-to-end assistance by our credit experts
  • Home loan interest rates offered to the applicants depend on their credit scores, monthly income, loan amount, LTV ratio, job profile, employer’s profile, etc.
  • Home loans usually involve large loan amounts and this along with their loan repayment tenures lead to high interest cost, which often exceeds their principal component.
  • As the interest rates offered on a home loan influences its cost of borrowing, applicants should always look for the lowest home loan rates available on their credit profile.
  • Home loan interest rates are offered on either floating basis or fixed basis where floating rates are generally lower than fixed rates.
  • Applicants should first check home loan offers from lenders with whom they maintain deposit(s) and/or credit account(s). They should also visit online financial marketplaces like Paisabazaar to compare the interest rates of other banks and HFCs and apply for the loan that suits their requirements the best.

Home loan processing fees may vary widely based on lenders and credit profiles of loan applicants. To get a fair idea of the home loan fees and charges, read the table below:

Particulars Charges
Processing Fee 1% – 2% of loan amount
Foreclosure/Prepayment Charges For floating rate: Nil
For fixed rate: Around 2% – 4% on the principal outstanding
Overdue Charges on EMI 2% per month of the unpaid EMI
EMI Bounce Charges Around Rs 400
Legal Fee As per Actuals

Home loan eligibility may vary across lending institutions and home loan schemes. However, a common set of housing loan eligibility criteria is given below:

Age Requirement

  • Minimum Age: 18 years whereas some lenders set the minimum age of 21 years
  • Maximum Age: Usually 70 years at the time of loan maturity with some lenders extending the tenure till 75 years of age

Minimum Income

  • Minimum Salary: At least Rs. 25,000 per month (varies across lenders & locations)
  • Monthly Income: Many lenders prefer self-employed applicants to have an income above Rs. 30,000.

Credit Score

  • Lenders prefer applicants to have credit score of 730 or above
  • Higher the score, better are the offers and lower can be the interest rate offered

Employment Type

  • Both salaried and self-employed individuals are eligible for home loans
  • As the risk in case of salaried individuals is less, such applicants tend to get better loan offers

Existing Liabilities/EMIs

  • A low Debt to Income (DTI) ratio, generally below 50 – 55%, is preferred by lenders
  • A high DTI ratio increases the credit risk leading to stricter loan terms and higher rates

Property Documentation

  • Properties with proper documentation helps in faster approval and higher loan eligibility.
  • Approved building plans, local authority clearances and completion certificates helps get better loan offers

Apart from the factors mentioned above, lenders may require applicants to fulfil additional eligibility such as,

  • Nationality: Indian Residents, Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs)
  • Work Experience: At least 2 years (for salaried)
  • Business Continuity: At least 3 years (for self-employed)
  • Loan Amount: Up to 90% of property value

Lenders require documents from their home loan applicants as a proof to establish their identity, place of residence, income and repayment capacity. These documents may vary across lenders based on the individual credit profile, property type, home loan type, etc.

Given below are the key home loan documents that an applicant will need to furnish when applying for the loan.

Proof of Identity PAN Card, Passport, Aadhaar Card, Voter ID Card or Driving License
Proof of Residence Bank Passbook, Voter ID Card, Ration Card, Passport, Utility Bills or LIC Policy Receipt
Proof of Income for Salaried Form 16, Salary Slips, ITR of past 3 years, Investment Proofs (if any)
Proof of Income for Self-Employed Business License Details, Proof of Business Address, ITR of last 3 years, Balance Sheet and Profit & Loss Account Statement of the Company/Firm
Property-related Documents NOC from Society/Builder, detailed estimate of the cost of construction of the house, registered sale deed, allotment letter and an approved copy of the building plan.
Other Documents If any previous loan from other lenders, then loan a/c statement for the last 1 year.

Banks and HFCs offer different types of home loan schemes to serve unique requirements of various customer segments. Below is a brief overview of some of the common types of home loans.

Home Purchase Loan

Consumers avail this loan for buying ready-to-move-in, under-construction and resale properties, as well as residential plots to build a house within a set time frame.

Home Construction Loan

Also known as self-construction home loan, this home loan type allows borrowers to construct their own house on plots already owned by them.

Plot Purchase Loan

This loan facility allows individuals to finance their plot purchases and then turn their dream home into reality within a pre-specified period.

Home Renovation

With this loan facility, borrowers can finance the expansion, renovation, improvement, structural changes or essential repairs of their existing homes.

Home Extension Loan

Existing homeowners can avail this type of home loan to extend their property or add more space to it to meet the needs of their growing family.

Overdraft Facility

This home loan variant allows borrowers to reduce their interest cost by depositing surpluses in the Overdraft account and make withdrawals as per their needs.

Step Up/ Flexi Home Loan

This type of home loan allows borrowers to service just interest components during the predetermined pre-EMI period and repay regular EMIs thereafter.

A home loan EMI calculator enables you to calculate the EMI, total interest and amount payable for a home loan. You have to provide the principal, interest rate and tenure to get the results.

You should check the EMI for multiple amounts and tenures to arrive at the best possible scenario for your desired home loan.

Paisabazaar’s home loan EMI calculator is free for all and you should utilise this feature to figure out the loan amount you should apply for.

Availing a home loan can help in the following ways:

Enabling home ownership sooner

  • Home prices in India are usually very high making it challenging for most people to buy a housing property on their savings alone.
  • A home loan, in those cases, can help you buy your dream home sooner without having to wait till you accumulate money for your dream home.
  • Utilising all your available savings/investments upfront for home purchase may adversely impact your other financial goals.
  • With a home loan, you can manage your finances better by committing only a portion of your annual income towards home purchase.

Longer repayment period

  • When compared to its alternatives like a personal loan, home loan offers longer repayment period usually extending up to 30 years.
  • Such a longer repayment period helps in spreading out the total loan amount, resulting in more affordable EMIs.

Lower interest rates

  • Home loan interest rates are significantly lower than personal loan interest rates.
  • Home loan interest rates start from 7.10% p.a. whereas personal loan interest rates usually start from 9.98% p.a.
  • Lower interest rates lead to reduction in the overall interest cost on the loan, making it more affordable for the borrowers.
  • Some banks/HFCs also offer interest concessions of 0.05% to women home loan applicants.

Tax benefits

  • As per Section 80C of the Income Tax Act, home loan borrowers can claim tax deduction of up to Rs. 1.5 lakh on principal repayments made in a financial year.
  • As per Section 24(b), a deduction of up to Rs. 2 lakh can be claimed on home loan interest payments made in a financial year.
  • However, it’s important to note that home loan borrowers choosing the new tax regime are not eligible to claim tax deductions under these Sections.

No prepayment charges

  • Most banks/HFCs offer home loans at floating interest rates.
  • Due to this, they do not levy any prepayment/foreclosure charges when borrowers prepay or foreclose their home loans.
  • Even in case of most fixed rate home loans, lenders may waive off prepayment/foreclosure charges, provided the prepayment is made from borrowers’ own fund sources.

Your home loan application can be rejected due to several reasons, some of them are listed as below:

Low credit score

  • Your credit score is a numerical representation of how well you have handled credit in the past.
  • Having a low credit score usually indicates poor financial discipline, causing lenders to deem you as a risky borrower and reject your home loan application.
  • Applicants with a credit score of 730 and above usually have higher chances of getting loan approval.

Low loan repayment capacity

  • Lenders usually prefer offering home loans to those having their total loan EMI obligations, including the EMI of the proposed loan, within 50-55% of their monthly income.
  • Those exceeding this limit have lower chances of availing home loan.

Issues related to property

  • If the property doesn’t meet the lender’s requirements (e.g., value, condition) or does not adhere to the regulations of the local authorities, it can lead to loan rejection.
  • For instance, lenders will not approve your loan application if your property is in some legal dispute, does not have a clear title, is too old or is not authorised by the local authorities.

Multiple loan or credit applications within a short span

  • Lender-initiated requests of credit reports are known as hard enquiries.
  • With every initiated hard enquiry, credit bureaus generally reduce the applicant’s credit score.
  • Making multiple hard inquiries within a short period may lead to a sharp decline in the applicant’s credit score, thus, reducing the chances of getting a home loan.

Ineligible occupation profile

Individuals whose occupation or employer profile is not among the lenders’ list of preferred occupation/employer profiles may not get their loans approved.

House loan borrowers can avail tax benefits under various sections of the Income Tax Act. These home loan tax benefits help borrowers save a substantial amount of money every year. Below are the tax benefits that you can get on your home loan EMI payments:

Section of Income Tax Act Nature of Home Loan Tax Deduction Max. Tax Deductible Amt.
Section 24(b) Interest paid Rs. 2 lakh
Section 80C Principal (including stamp duty and registration fee) Rs. 1.5 lakh

It is noteworthy that these benefits can be claimed only if the borrower files the ITR under the old regime. These benefits are not applicable under the new tax regime. Joint home loan borrowers can benefit more if the principal and interest amount is considerably high.

Dos Don’ts
Keep your credit score at 730 or above Apply for home loan without checking your credit score
Limit your total EMI obligations within 50-60% of your net monthly income Use emergency fund for making higher down payment
Compare home loan offers from various lenders Apply with multiple lenders within a short span
Try making larger down payment to reduce LTV ratio Forgo existing investments for making higher down payment
Add a co-applicant for higher loan eligibility Plan EMI payments without considering the monthly contributions you need to make towards your crucial financial goals

No, you cannot take a home loan for the entire property value as the Reserve Bank of India (RBI) has limited the loan-to-value (LTV) ratio of housing loans. As per RBI guidelines, for loan amounts up to Rs 30 lakh, the LTV ratio can go up to 90% of the property value; for loan amounts above Rs 30 lakh and up to Rs 75 lakh, the LTV ratio limit is up to 80% of the property value and for loan amounts above Rs 75 lakh, the LTV ratio can go up to 75% of the property value.

This means that at least 10% of the remaining value has to be paid by the borrower as down payment. Subject to the caps set by the RBI on LTV ratios, banks/HFCs further fix the LTV ratio on the basis of the risk assessment and credit profile of the loan applicant. Those with lower creditworthiness are usually offered lower LTV ratio.

The Government of India offers subsidies on home loans through the Pradhan Mantri Awas Yojana – Urban 2.0. Under this scheme, financial assistance of up to Rs 2.5 lakh per unit has to be provided to 1 crore urban poor and middle-class families for purchasing, building or renting affordable homes in urban areas.

A home loan balance transfer can be a smart financial move if you want:

Lower Interest Rates

  • If your credit profile has improved over time, you may now be eligible for lower interest rates than what you were initially offered.
  • Transferring your loan to a lender offering better rates can reduce your EMIs and overall interest burden.

Longer Loan Tenure

  • Some lenders offer the option to extend your loan tenure beyond the residual term of your current loan.
  • This helps in lowering your monthly EMIs, although it might increase the total interest paid over the loan period.

Top-Up Loan Facility

  • Balance transfer applicants often become eligible for a top-up loan, which can be used for personal or professional purposes without end-use restrictions.
  • This is beneficial if your current lender isn’t offering a top-up loan or is charging a higher interest rate on it.

Additional Benefits

  • Switching to a new lender might also offer perks like zero processing fees, EMI waivers, or better customer service, enhancing your overall loan experience.
  • A balance transfer, however, may not be ideal if you’re in the later stages of your home loan tenure or if the net savings after deducting the applicable fees and charges such as processing fees (charged by the new lender) and foreclosure charges (applicable only in case of fixed rates) are minimal.
  • Always calculate the total cost-benefit before deciding to transfer your home loan.
  • Already having a high DTI ratio, generally above 60%, may reduce your chances of home loan approval.
  • Applying for 100% LTV ratio i.e., the loan amount equal to the property value, may lead to a loan rejection.
  • Applying for a number of loans in a short span can also lead to the loan rejection.
  • The home loan may get rejected if the property is in some legal dispute, does not have a clear title, is too old or is not authorised by the local authorities.
  • The lender may reject the loan request if income documents such as salary slips, ITR, P&L statement, etc. are not provided.

Compare Home Loan Interest Rates of Leading Banks in India

Current Home Loan Interest Rates in India

Name of Lender Up to Rs. 30 Lakh Above Rs. 30 Lakh & Up to Rs. 75 Lakh Above Rs. 75 Lakh
Aditya Birla Capital 8.50% - 13.50% 8.50% - 13.50% 8.50% - 13.50%
Axis Bank 8.60% - 12.70% 8.60% - 12.70% 8.60% - 9.05%

Bajaj Housing Finance

 8.70% onwards 8.70% onwards 8.70% onwards
Bandhan Bank 8.65% - 14.00% 8.65% - 14.00% 8.65% - 14.00%
Bank of Baroda 8.60% - 10.35% 8.60% - 10.35% 8.60% - 10.60%
Bank of India 8.65% - 10.60% 8.65% - 10.60% 8.65% - 10.60%
Bank of Maharashtra 8.35% - 10.55% 8.35% - 10.80% 8.35% - 10.80%
Canara Bank 8.55% - 13.35% 8.55% - 13.35% 8.55% - 13.35%
Citibank 8.00% onwards 8.00% onwards 8.00% onwards
Dhanlaxmi Bank 9.15% - 10.30% 9.15% - 10.30% 9.15% - 10.30%
Federal Bank 8.60% - 10.05% 8.60% - 10.05% 8.60% - 10.05%
GIC Housing Finance 8.10% onwards 8.10% onwards 8.10% onwards
Godrej Housing Finance 8.39% - 10.99% 8.39% - 10.99% 8.39% - 10.99%
HDFC Ltd. 8.65% - 10.35% 8.65% - 10.60% 8.65% - 10.70%
HSBC 8.35% - 9.20% 8.35% - 9.20% 8.35% - 9.20%
ICICI Home Finance 9.20% onwards 9.20% onwards 9.20% onwards
ICICI Bank 8.75% - 9.85% 8.75% - 9.85% 8.75% - 9.85%
Indiabulls Housing Finance 8.95% onwards 8.95% onwards 8.95% onwards
Indian Bank 8.50% - 10.15% 8.50% - 10.15% 8.50% - 10.15%
Indian Overseas Bank 9.30% - 10.70% 8.50% onwards 8.50% onwards
Karnataka Bank 8.67% - 9.99% 8.67% - 9.99% 8.67% - 9.99%
Karur Vysya Bank 8.95% - 11.85% 8.95% - 11.85% 8.95% - 11.85%
Kotak Mahindra Bank 8.65% onwards 8.65% onwards 8.65% onwards
L&T Housing Finance 8.40% - 8.60% 8.40% - 8.60% 8.40% - 8.60%
LIC Housing Finance 8.65% - 10.10% 8.65% - 10.30% 8.65% - 10.50%
PNB Housing Finance 8.75% - 13.00% 8.75% - 13.00% 8.85% - 10.85%
Punjab & Sind Bank 8.60% - 9.70% 8.60% - 9.70% 8.60% - 9.70%
Punjab National Bank 8.60% - 9.35% 8.55% - 9.25% 8.55% - 9.25%
RBL Bank 8.90% - 11.30% 8.85% - 11.05% 8.85% - 11.05%
Repco Home Finance 9.00% onwards 9.00% onwards 9.00% onwards
South Indian Bank 9.25% - 12.00% 9.25% - 12.00% 9.25% - 12.00%
Standard Chartered 8.40% onwards 8.40% onwards 8.40% onwards
State Bank of India 8.75% - 9.50% 8.75% - 9.40% 8.75% - 9.40%
Tamilnad Mercantile Bank 8.75% - 9.25% 8.75% - 9.25% 8.75% - 9.25%
Tata Capital Housing Finance 8.95% onwards 8.95% onwards 8.95% onwards
UCO Bank 8.75% - 9.75% 8.75% - 9.75% 8.75% - 9.75%
Union Bank of India 8.60% - 10.50% 8.60% - 10.70% 8.60% - 10.70%

Note: Interest rates as of 3 January 2023

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