Home Loan
A home loan, also called a housing loan or mortgage, is a secured loan provided by banks and housing finance companies to individuals for purchasing, constructing, or renovating a residential property, with the property itself pledged as collateral.
Home loans were the single largest financial commitment for most Indian households and the largest retail asset category on the balance sheets of Indian banks and housing finance companies. The combination of rising property prices, a growing urban middle class, and government incentives to promote home ownership meant that home loan disbursements grew consistently for decades.
Home loans in India were offered at both fixed and floating rates. Fixed-rate home loans maintained the same interest rate throughout the tenure or for an initial period, providing payment certainty but often at slightly higher initial rates. Floating-rate loans were linked to a benchmark — most commonly the bank's Repo Rate Linked Lending Rate (RLLR) after the RBI made external benchmark-linked lending mandatory for new retail loans from 2019. As the RBI repo rate changed, the floating home loan rate moved in tandem, within the reset periods specified in the loan agreement.
The eligibility for a home loan depended on the borrower's income, credit score, age, existing liabilities, and the property's legal and technical valuation. Lenders typically funded up to 75–90% of the property's market value or registered price (whichever was lower), requiring the borrower to contribute the remaining amount as a down payment. This loan-to-value (LTV) ratio was governed by RBI guidelines, which imposed lower LTV ceilings for higher loan amounts.
Tenures ranged from 5 to 30 years, with most borrowers choosing 20–25 year tenures to keep EMIs manageable. However, a longer tenure substantially increased the total interest paid. A Rs 50 lakh loan at 8.5% for 20 years resulted in a cumulative interest outflow of roughly Rs 57 lakh — more than the loan principal itself. This made prepayment, whenever surplus funds were available, an extremely high-return action for home loan borrowers.
The tax treatment of home loans was one of the most significant features for salaried taxpayers under the old tax regime. Principal repayments qualified for deduction under Section 80C (up to Rs 1.5 lakh per year), and interest payments on self-occupied properties were deductible under Section 24(b) (up to Rs 2 lakh per year). For let-out properties, the full interest was deductible against rental income. These deductions significantly reduced the after-tax cost of borrowing for eligible taxpayers.