Why PSBs are raising home loan rates

Some public sector banks, including State Bank of India (SBI), Union Bank of India, Canara Bank, and Bank of India, are increasing the spread on home loans for new customers to protect margins.

While they have passed on policy repo rate cuts to borrowers, the reductions in savings and term deposit rates have yet to generate substantive gains.

A senior SBI executive said the slight tweak (hike) in home loan rates is due to a reduction in business discount, while the risk premium remains unchanged.

The move is partly aimed at protecting the net interest margin (NIM) during a phase when policy rate cuts have been passed on to borrowers, but deposit rate repricing is still underway.

The bank’s NIM for domestic operations declined to 3.02 per cent in the April-June quarter (Q1) of 2025-26 (FY26), down from 3.35 per cent a year ago and 3.15 per cent in the January-March quarter of 2024-25 (FY25).

While the 7.5 per cent rate is the starting point, the actual rate depends on the borrower’s credit score.

The hike is not expected to dent demand, as home loan decisions are usually based on long-term considerations rather than a few basis points (bps).

SBI’s home loan portfolio grew by 15.05 per cent, with an outstanding book of ~8.5 trillion at the end of June 2025, and is expected to continue growing at a steady pace of 14-15 per cent. Mumbai-based Union Bank of India has also increased its home loan rates.

An executive said margins on many loan products, including home loans, are already thin, prompting banks to look for ways to ease pressure.

Union Bank opted for a small hike of 25 bps. Its rate is now 7.45 per cent for borrowers with a credit score of 750 and above.

The bank’s NIM fell from 3.15 per cent in Q1FY25 to 2.76 per cent in Q1FY26.

Hinting at upward revision, a Canara Bank executive said the bank’s asset liability committee (Alco) will meet in the coming days to review interest rates, including for home loans.

Given the need to protect NIM, rates on housing credit may rise, but likely 5-10 bps lower than competitors, he added.

Supporting this view, an executive with Bank of India said its Alco will meet closer to the end of the month to review rates, including home loans.

Margins are under pressure as the bank has passed on rate cut benefits and is seeking room to adjust rates.