What Is Home Loan Spread And How Does It Affect Your EMI?
For many Indians, owning a home is a significant financial aspiration. Home loans have, for decades, enabled millions of people to realise their dream of homeownership. Essentially, they break down the purchase cost into smaller, manageable installments, making repayment easier over several years. Understanding the various aspects of a home loan can empower borrowers to manage their debt efficiently. One such crucial aspect that is key to debt management is your home loan spread and it significantly influences the interest rate you pay on your loan. What Is A Home Loan Spread? The interest rate of a home loan comprises two parts: the benchmark rate (base rate set by the bank), and the loan spread. Since 2019, all loan benchmark rates have been linked to the Reserve Bank of India’s (RBI) repo rate, currently at 6.25 per cent. The loan spread, on the other hand, is an additional percentage added by the lender and varies depending on the borrower’s credit score, income stability, and the total loan amount, among other factors. In today's home loan market, the lowest rate spreads range broadly between 1.85 per cent and 3.75 per cent. So, depending on your financial profile, your approximate home loan interest rate could range anywhere from 8.10 per cent (6.25 per cent + 1.85 per cent) to 10.00 per cent (6.25 per cent + 3.75 per cent). Why Is The Spread Important? While benchmark rates fluctuate based on RBI’s policies and market movements, the loan spread rate remains constant throughout the loan tenure. As a result, a lower spread helps reduce overall interest costs, making the home loan more affordable. Over the past few years, the average loan spread has declined significantly. For instance, in 2020, the spread hovered around 3.50 per cent, dropping to 1.95 per cent in 2023, and further to 1.85 per cent in 2025. A lower spread benefits borrowers when interest rates are cut. For example, if the repo rate drops to 5 per cent, a borrower with a 1.85 per cent spread will pay 6.85 per cent interest. Compared to this, another borrower with a 2.65 per cent spread will pay 7.65 per cent interest, leading to higher EMIs. Also Read : Unemployment In Women In Urban Areas Dips In Q3, Reveals Survey Who Gets The Lowest Spread? Lenders usually offer lower spreads to borrowers with high credit scores (750+), a strong repayment history, and a stable income. New borrowers are more likely to benefit from lower spreads, whereas existing borrowers may find themselves with a higher spread, and rates. If you have an existing loan with a high spread, refinancing may help you secure a better rate. How To Reduce Your Loan Burden There are various strategies you can adopt to reduce your debt burden faster. Refinance with your existing lender – Request your existing lender for a lower spread but check the processing fee beforehand. Balance transfer to another lender – Transfer your loan to a bank offering a lower spread, but account for additional costs like processing and legal fees to assess actual savings. Prepay 5 per cent of your loan balance yearly – With a higher income, prepaying 5% of your loan annually can help reduce your overall debt faster. Pay one extra EMI annually – By paying one extra EMI every year, you can cut down your interest payments significantly. Hike your EMI – If you have funds to spare, increase your loan EMI to lower your interest costs and loan tenure. Pre-close your loan if rate is too high – If your loan rate is untenable and you have surplus funds, consider paying off your entire loan early. Assess the financial impact of this beforehand. Your home loan spread is a key element of the borrowing process and understanding it can help you make informed decisions about managing your loan. New borrowers can maximize the benefits of low spreads by improving their loan eligibility and borrowing profile. Existing borrowers should review their loan terms and consider refinancing if they are paying a higher rate. (The author is the Senior Manager - Communications at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)
For many Indians, owning a home is a significant financial aspiration. Home loans have, for decades, enabled millions of people to realise their dream of homeownership. Essentially, they break down the purchase cost into smaller, manageable installments, making repayment easier over several years. Understanding the various aspects of a home loan can empower borrowers to manage their debt efficiently. One such crucial aspect that is key to debt management is your home loan spread and it significantly influences the interest rate you pay on your loan.
What Is A Home Loan Spread?
The interest rate of a home loan comprises two parts: the benchmark rate (base rate set by the bank), and the loan spread. Since 2019, all loan benchmark rates have been linked to the Reserve Bank of India’s (RBI) repo rate, currently at 6.25 per cent. The loan spread, on the other hand, is an additional percentage added by the lender and varies depending on the borrower’s credit score, income stability, and the total loan amount, among other factors.
In today's home loan market, the lowest rate spreads range broadly between 1.85 per cent and 3.75 per cent. So, depending on your financial profile, your approximate home loan interest rate could range anywhere from 8.10 per cent (6.25 per cent + 1.85 per cent) to 10.00 per cent (6.25 per cent + 3.75 per cent).
Why Is The Spread Important?
While benchmark rates fluctuate based on RBI’s policies and market movements, the loan spread rate remains constant throughout the loan tenure. As a result, a lower spread helps reduce overall interest costs, making the home loan more affordable.
Over the past few years, the average loan spread has declined significantly. For instance, in 2020, the spread hovered around 3.50 per cent, dropping to 1.95 per cent in 2023, and further to 1.85 per cent in 2025.
A lower spread benefits borrowers when interest rates are cut. For example, if the repo rate drops to 5 per cent, a borrower with a 1.85 per cent spread will pay 6.85 per cent interest. Compared to this, another borrower with a 2.65 per cent spread will pay 7.65 per cent interest, leading to higher EMIs.
Also Read : Unemployment In Women In Urban Areas Dips In Q3, Reveals Survey
Who Gets The Lowest Spread?
Lenders usually offer lower spreads to borrowers with high credit scores (750+), a strong repayment history, and a stable income. New borrowers are more likely to benefit from lower spreads, whereas existing borrowers may find themselves with a higher spread, and rates. If you have an existing loan with a high spread, refinancing may help you secure a better rate.
How To Reduce Your Loan Burden
There are various strategies you can adopt to reduce your debt burden faster.
Refinance with your existing lender – Request your existing lender for a lower spread but check the processing fee beforehand.
Balance transfer to another lender – Transfer your loan to a bank offering a lower spread, but account for additional costs like processing and legal fees to assess actual savings.
Prepay 5 per cent of your loan balance yearly – With a higher income, prepaying 5% of your loan annually can help reduce your overall debt faster.
Pay one extra EMI annually – By paying one extra EMI every year, you can cut down your interest payments significantly.
Hike your EMI – If you have funds to spare, increase your loan EMI to lower your interest costs and loan tenure.
Pre-close your loan if rate is too high – If your loan rate is untenable and you have surplus funds, consider paying off your entire loan early. Assess the financial impact of this beforehand.
Your home loan spread is a key element of the borrowing process and understanding it can help you make informed decisions about managing your loan. New borrowers can maximize the benefits of low spreads by improving their loan eligibility and borrowing profile. Existing borrowers should review their loan terms and consider refinancing if they are paying a higher rate.
(The author is the Senior Manager - Communications at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)
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