Home Loan Guide
India 2026

How Home Loans Work in India

A home loan (also called a housing loan or mortgage) is money borrowed from a bank or NBFC to purchase, construct or renovate a residential property. The property itself serves as collateral — the lender holds a charge on the title until the loan is fully repaid. If you default, the lender has the legal right to take possession and sell the property.

Home loans in India are generally long-term instruments — 15 to 30 years. The monthly repayment, called EMI (Equated Monthly Instalment), covers both the interest on the outstanding loan and a portion of the principal. In the early years, most of the EMI goes towards interest. As the loan matures, a greater portion goes towards principal repayment.

Understanding Your EMI — The Full Breakdown

EMI is calculated using the reducing balance method with this formula:

EMI = P × r × (1+r)^n / ((1+r)^n - 1)

Where: P = principal loan amount, r = monthly interest rate (annual rate ÷ 12), n = number of monthly instalments.

What this means practically: on a ₹50 lakh home loan at 8.5% for 20 years, your EMI is approximately ₹43,391 per month. You will pay a total of ₹1.04 crore over 20 years — of which ₹54.1 lakh is pure interest and only ₹50 lakh is principal. The bank effectively doubles your money over 20 years.

Loan Amount	8.5% / 20 yr	8.5% / 15 yr	9.0% / 20 yr	Total Interest (8.5%/20yr)
₹30 lakh	₹26,034	₹29,543	₹26,992	₹32.5 L
₹50 lakh	₹43,391	₹49,238	₹44,986	₹54.1 L
₹75 lakh	₹65,086	₹73,857	₹67,479	₹81.2 L
₹1 crore	₹86,782	₹98,476	₹89,973	₹1.08 Cr

Home Loan Eligibility — What Banks Look At

Banks use a combination of income, existing obligations, credit score and property value to determine how much they'll lend. The most important factors:

FOIR — Fixed Obligation to Income Ratio

FOIR is the percentage of your gross monthly income that goes towards all EMI obligations combined. Most banks allow a maximum FOIR of 40–50%. This means if your gross salary is ₹1 lakh per month, the maximum combined EMI (existing + new home loan) the bank will allow is ₹40,000–₹50,000.

If you have an existing car loan EMI of ₹10,000, the available EMI for your home loan is only ₹30,000–₹40,000 — which at 8.5% over 20 years equates to a loan of approximately ₹35–₹46 lakh.

Credit Score (CIBIL)

Your CIBIL score is the single most important factor after income. Here's how it affects your home loan:

• 750–900: Best rates, high approval probability, processing fee waivers
• 700–749: Good approval chances, slightly higher rate (0.05–0.15% premium)
• 650–699: Approval possible with higher rate or co-applicant
• Below 650: Most banks reject; NBFCs may approve at significantly higher rates

LTV — Loan to Value Ratio

RBI regulations cap the maximum loan you can get relative to the property value:

• Property value up to ₹30 lakh: maximum LTV 90% (10% down payment)
• Property value ₹30–75 lakh: maximum LTV 80% (20% down payment)
• Property value above ₹75 lakh: maximum LTV 75% (25% down payment)

Understanding Home Loan Interest Rates — Fixed vs Floating

Floating Rate (RLLR / EBLR Linked)

Most home loans in India are on floating rates linked to the bank's External Benchmark Lending Rate (EBLR), which moves with the RBI repo rate. When RBI cuts the repo rate, your EMI can reduce (or tenure shortens). When RBI raises rates, your EMI or tenure increases.

SBI, HDFC, ICICI and most PSU banks use RLLR (Repo Linked Lending Rate) = Repo Rate + Spread. As of March 2026, SBI home loan rate = 8.50% = Repo Rate (6.25%) + Spread (2.25%). RBI has cut rates twice in early 2026; expect further cuts if inflation stays low.

Fixed Rate

Some banks offer fixed rates for the entire tenure or for an initial period (say 2–5 years). Fixed rates are typically 0.5–1.5% higher than floating. They make sense only when you expect interest rates to rise significantly — which is difficult to predict accurately. Most financial advisers recommend floating rate loans.

Prepayment Strategy — How to Save Lakhs

One of the most financially powerful moves for a home loan borrower is prepayment — paying more than the EMI, reducing the principal and saving enormous interest over the tenure.

Impact of Prepayment

On a ₹50 lakh, 8.5%, 20-year loan: a one-time prepayment of ₹5 lakh (10% of principal) at the start of year 5 reduces the total interest by approximately ₹8–10 lakh and cuts tenure by 2–3 years. No other financial action on the same ₹5 lakh produces equivalent risk-free returns.

Prepayment Rules

• Floating rate loans: No prepayment penalty as per RBI guidelines. You can prepay any amount, any time.
• Fixed rate loans: Banks may charge a foreclosure penalty (typically 2–3% of outstanding principal) if prepaid before the lock-in period.

Invest vs Prepay — The Decision Framework

This is the most common financial dilemma for home loan borrowers. The answer depends on your effective loan rate after tax benefit:

• If effective home loan rate > expected investment return: Prepay first
• If effective home loan rate < expected investment return: Invest instead

Under the old tax regime, Section 24(b) allows ₹2 lakh deduction on home loan interest. For someone in the 30% slab, the effective cost of a 8.5% loan is approximately 5.95% after tax benefit. A Nifty 50 index fund has historically returned 12–14% CAGR over 10-year periods. In this scenario, investing typically wins. But do consider that investment returns are variable while loan savings are guaranteed.

Home Loan Tax Benefits — Old Regime

Home loans offer two major tax deductions under the old regime:

Section 80C — Principal Repayment

Principal repayment (not the full EMI — only the principal portion) qualifies for 80C deduction, up to ₹1.5 lakh per year. This is counted within the overall 80C limit, which includes EPF, PPF, ELSS etc. Since most early-tenure EMIs are predominantly interest with minimal principal, this deduction is small in the first few years.

Section 24(b) — Home Loan Interest

Interest paid on a home loan for a self-occupied property is deductible up to ₹2,00,000 per year. For a let-out property, the entire interest paid is deductible against rental income (with losses set-off rules applying). This is the bigger and more impactful deduction — ₹2 lakh for someone in the 30% slab saves ₹62,400 in tax annually.

Buying vs Renting — The Financial Reality

This is India's most debated personal finance question. The maths depends heavily on your city, property price, rental yield and how long you plan to stay.

When Buying Makes Sense

• You plan to stay in the same city for 7+ years
• The property price-to-annual-rent ratio is below 20 (i.e., rent is more than 5% of property value annually)
• You have the down payment and emergency fund ready
• EMI is less than 30–35% of your monthly take-home salary

When Renting Makes Sense

• You're uncertain about your city for the next 5 years
• Property prices are very high relative to rent (price-to-rent ratio > 25)
• The EMI would be more than 40% of your take-home salary
• Your emergency fund and retirement savings are not yet established

In Mumbai, the price-to-rent ratio for most localities is 30–45, meaning owning is financially inefficient compared to renting and investing the difference. In Tier-2 cities like Indore or Jaipur, the ratio is often 15–20, where buying makes more financial sense.

Home Loan Application — Step by Step

1. Check CIBIL score — get a free report annually from CIBIL. Fix errors before applying.
2. Calculate your budget — property price, down payment, registration costs and EMI affordability.
3. Compare lenders — compare at least 3 banks on interest rate, processing fee, FOIR limits and top-up facility.
4. Get pre-approval / sanction letter — most banks issue a sanction letter (in-principle approval) before you finalise a property, which strengthens your negotiating position with sellers.
5. Property legal check — verify title, encumbrance certificate, building approval plans and RERA registration before signing.
6. Loan disbursement — for under-construction properties, disbursement is in stages (linked to construction milestones). For ready-to-move, it is typically a single disbursement.
7. Register the property — stamp duty and registration is typically 4–8% of property value, varying by state.