Home Loans & Finance
What is a Home Loan? How It Actually Works
The largest cheque most people ever sign for, and the one they research least. Here is what actually matters — and the RBI rule that most borrowers have never heard of.
The short answer
A home loan is money lent against your property, which the lender holds as security until you have repaid it.
Three things almost nobody tells you at the start:
1. There is no 100% home loan. LTV is capped — you must fund 10–25% yourself, plus stamp duty and registration on top.
2. RBI has banned prepayment charges on floating-rate home loans to individual borrowers.
3. The headline rate is not the cost.
What a home loan is
A secured loan. The lender advances you money to buy a property, and holds that property as collateral until you have repaid.
Because it is secured, home loan rates are the lowest of any retail borrowing in India. Because it is secured, the lender can take the property if you don't pay. Both of those follow from the same fact.
There is no 100% home loan
RBI caps how much a lender may advance against a property, as a percentage of its value:
• Loan up to ₹30 lakh → up to 90% LTV
• Loan ₹30–75 lakh → up to 80% LTV
• Loan above ₹75 lakh → up to 75% LTV
So on an ₹80 lakh flat you must find at least ₹16 lakh yourself.
And that's before stamp duty and registration — another ₹5 lakh or so, which the loan does not cover. Nor does it cover the corpus fund, the advance maintenance, or the parking.
Budget 25–30% of the flat's price in cash. Not 20%. People get this wrong and discover it late.
How your interest rate is actually built
Your floating rate is not a single number the bank invents. It is:
The formula
Your rate = The external benchmark + The bank's spread
- The benchmark
- Usually the RBI repo rate. Published. Verifiable. Moves with policy.
- The spread
- The bank's margin — set by your CIBIL score, your income, your LTV, your employer.
The benchmark is the same for everyone. The spread is what you negotiate. And the spread is where a good credit score turns into real money.
The rule nobody knows
If you are an individual borrower on a floating rate home loan, the lender cannot charge you a prepayment penalty or a foreclosure fee. Not on a part-payment. Not on closing the loan entirely. Not even if you refinance with a competitor.
This is enormous, and most borrowers have never been told.
It means: every rupee of bonus, every windfall, every year you can spare something — you can throw at the principal, for free, and cut years off the loan.
Fixed-rate loans are different. They may carry prepayment charges. That is one of the real, and rarely mentioned, costs of choosing fixed.
The rate is not the cost
| Why it matters | |
|---|---|
| The interest rate | Obviously. But it is one line of several. |
| The processing fee | 0.25%–1% of the loan, sometimes capped. On ₹80 lakh that is up to ₹80,000. Negotiable — and frequently waived, if you ask. |
| Legal & technical valuation charges | A few thousand. Sometimes bundled into the processing fee, sometimes not. |
| The reset frequency | EBLR loans reset at least quarterly. A rate cut reaches you faster on a shorter cycle. |
| Bundled insurance | Watch this one. Lenders frequently push a loan protection policy, sometimes financed into the loan itself so you pay interest on the premium for 20 years. It is not mandatory. Compare it with a plain term plan. |
| The spread | Fixed at sanction, for you. Negotiate it before you sign — afterwards you cannot. |
| Prepayment terms | Free on floating. Check carefully on fixed. |
A loan at a slightly higher rate with no processing fee and a bundled insurance you declined can easily beat a 'cheaper' loan with Rs 80,000 of fees and a policy you didn't want. Compare the total, over the tenure — not the headline.
How it actually runs
- Check your CIBIL score — free, once a year, from each bureau. Fix errors before you apply.
- Get pre-approved. A sanction in principle tells you what you can actually borrow, and makes you a serious buyer.
- Apply, with income documents, KYC, bank statements, and the property papers.
- The lender does a technical valuation (is the property worth it? is it structurally sound?) and a legal check (is the title clean? is the project approved?).
- Sanction letter — the offer. Read the spread, the fee, the reset frequency.
- Disbursal — in full for a ready property, in stages for one under construction.
- Pre-EMI, if under construction — interest only, on what has been disbursed.
- Full EMI begins.
The bank will run a technical and legal appraisal, and people find that reassuring. It is not a title search done for your benefit.
The bank is protecting its security — it wants to know it can sell the flat if you default. That is a narrower question than 'is this title clean enough for me to own for thirty years and pass to my children'.
Get your own lawyer. A bank approving a loan is not the same as a lawyer approving a title.
Home loan rates and the RBI's repo rate move. A page that says 'the rate is X%' is wrong within months, and quietly misleads everyone who reads it afterwards.
So we explain how the mechanism works — which does not change — and leave the number to you.
For the current repo rate, check the RBI's own website. For current home loan rates, check three or four lenders directly. Both take five minutes, and both are more reliable than anything a content site tells you.
Frequently asked questions
Can I get a 100% home loan in India?
No. RBI caps loan-to-value: up to 90% for loans up to Rs 30 lakh, up to 80% for Rs 30-75 lakh, and up to 75% above Rs 75 lakh. And the loan does not cover stamp duty and registration either — budget 25-30% of the price in cash, not 20%.
Are there prepayment charges on a home loan?
Not on a floating-rate home loan to an individual borrower — RBI has banned prepayment and foreclosure charges on those. You can part-pay, close the loan, or refinance with a competitor, free. Most borrowers have never been told this. Fixed-rate loans are different, and may carry charges.
How is my home loan interest rate decided?
Your floating rate is the external benchmark — usually the RBI repo rate — plus the bank's spread. The benchmark is the same for everyone. The SPREAD is what varies, and it is set by your CIBIL score, income, LTV and employer. That is the part you negotiate, and you can only do it before you sign.
Is the bank's legal check the same as my own title check?
No, and this matters. The bank is protecting its own security — it wants to know it can sell the flat if you default. That is a narrower question than whether the title is clean enough for you to own for thirty years and pass on. Get your own lawyer. A bank approving a loan is not a lawyer approving a title.
Do I have to take the insurance the lender offers?
No. Loan protection policies are frequently pushed and sometimes financed into the loan itself — so you pay interest on the premium for twenty years. It is not mandatory. Compare it against a plain term life policy for the same cover, which is usually far cheaper.