Taking a home loan is one of the smartest ways to finance your dream home project. It ensures that while you’re in the process of purchasing or building it, you get ownership by making smaller, regular payments.
While the process is relatively smooth and simple, you may find yourself confused by some of the terms used in the housing loan contract, or by some of the conditions imposed by lenders.
One of the crucial aspects of a home loan is the interest that is added to the principal amount. This component is added on to represent the cost and risk incurred by the lender when they offer loans.
There are different lenders operating in the home loan market today. They include private and public sector banks, foreign banks and housing finance companies. They offer more or less similar home loan interest rates, but every small increment or decrease can make a huge difference to your EMI payments. The rate of interest may also change with changes in government notifications from the Reserve Bank, so it’s important to stay abreast of the latest information.
Understanding Home Loan Interest Rates
An interest rate represents the cost of the loan which you pay back over a fixed tenure, along with the principal that you have borrowed. This cost can be paid through equated monthly installments (EMI).
Most banks use the repo (repossession) rate set by the Reserve Bank of India as a benchmark along with an added amount, to set their own interest rates. This is why you may get slight but significant variations in interest rates across different lenders. The MCLR (marginal cost of funds lending rate) is a deciding factor that affects lending rates because banks cannot lend below this margin.
Changes in MCLR rates can affect your home loan interest rates, so stay alert to these aspects. There are several other similar factors that could play a role in determining your interest rate.
A Step By Step Guide
It is important to explore as many trustworthy options as possible in the housing loan sector to observe the range of interest rates that are on offer.
Check your credit score and other eligibility criteria that are demanded by your lender.
Look at both fixed and floating rates in detail. There are slight differences in the rates of interest in these options. You can select the one that best aligns with your current and future financial situation. Some lenders offer hybrid rates that combine both fixed and floating rates.
Get details on the exact principal amount and loan tenure. A higher credit score will automatically make you eligible for a larger principal amount and a more lengthy tenure if you want. If your credit score is not up to the mark, you can try to improve it before you apply for the loan. Or you can apply along with a co-borrower who has a better credit score.
Check the processing fees thoroughly so that you don’t face any surprises down the line. If you have maintained a stable relationship with the lender, these terms could be negotiable to some extent.
You can calculate your unique home loan EMI either manually or by using online emi calculator provided by most lenders. There is a fixed formula to calculate EMI: (PxRx (1+R)N )/((1+R)N – 1) where P is the principal amount, R is the rate of interest, and N is the number of monthly installments.
Alternately, you can use the online tool available on the websites of most banks and housing finance companies which helps you to calculate the home loan interest rates and EMI.
Talk to your lender about pre-payment options that will reduce your burden if you come into a windfall unexpectedly during the tenure of the housing loan.
Read the fine print on your contract very carefully. If you’re a first time borrower, it’s worthwhile to get some professional help that will assist you in boosting your understanding of the loan process and interest calculation.
If you can afford a larger down payment, this is a good strategy to reduce the rates of borrowing.
