Understanding the Home loan interest rates

Posted by Anurag Mishra on May 17th, 2017

Housing loan interest rates vary based on the amount of the loan, the applicant’s credit worthiness and the previous relationship between the lender and borrower. Earlier the interest rate was linked to the RBI’s prescribed base rate, but now the marginal cost of lending rate method is used to calculate the applicable interest rate on the home loan.

Housing loans carry two different types of interest rate, the fixed interest rate and the floating interest rate. The fixed interest rates are unaffected by the market conditionswhile the floating interest rates are periodically revised by the lending institution. While the interest rate remains unchanged in the fixed interest rate and the floating interest rate change with the marginal cost of lending rate of the bank.

The lending rates decided by the banks are determined by their cost of funds. Banks and the non-banking financial institutions offer lower housing loan interest rate as compared to personal loans and traditional finances. Home loan interest rates are low and preferential for people who have stable incomes like the self-employed and the salaried people. When banks and the financial institutions decidethe individual’s maximum eligibility for the home loan,they’re basically trying to understand whether the person can afford the loan or not. Home loan EMIs consist of two key components, the principal amount to be repaid and the housing loan interest rate that is applicable on the loan amount. When the interest rate is high, the EMI which is directed toward the meeting the interest is also high, while when it is low the EMIs principal repayment component becomes low. Therefore the housing loan interest rate is crucial towards the calculation of the home loan eligibility.

Understanding the housing loan interest rate fluctuations:

Floating interest rate

When an individual takes a home loan, it is initially taken at a certain interest rate that later gets converted into floating rate and the formula that is applicable for the conversion is specified in the loan agreement. The formula which is currently used is the MCLR added with a spread determined by the bank or the non-banking financial institutions as per the borrower’s profile. As per the currentrules of the reserve bank of India, the banks or the financial institutions need to revise their formula every six months or a year.

Fixed housing loan interest rate

When the interest rate is fixed for a specific tenure, the tenure should not be exceeding 15 years. Check the time frame or the duration in the loan agreement through which the home loan interest remains fixed at the rate as it was originally allocated. Even the fixed loan interest rates change periodically however the changes are much lessfrequent than observed in case of the floating housing loan interest rate. The loan agreement also explains the formula if the home loan gets converted to a floating interest rate.

It is always better if the person compares the various housing loan interest ratesgiven by banks and non-bankingfinancialinstitutions.  He can do this online on the various comparing sites and avail for the home loan which offers lower interest rate and flexibility in the repayment mode.