What is the Interest Rate on Home Loans?

A home loan is a step towards getting a dream home for many. There are several banks and non-banking financial corporations that offer home loans at attractive interest rates. However, for availing of one of these schemes, an applicant needs to have a clean record and thus, a good CIBIL score. It is important to check the home loan interest rate before finalizing on a certain financial corporation. This can be done by tallying and comparing the rates provided by banks along with making a list of the added benefits. Home loans are generally long-term loans that involve a certain sense of trust from both the sides of the borrower as well as the lender.

There are some basics you must be aware of while considering a home loan. While most advisories and articles might be full of them, it is often difficult to narrow down on the effective ones. 

Calculation of interest

Home loans are generally long ones and thus, it is always wise to figure out an approximate value of the interest liability. Home loan interest rates are mostly economic if you are availing the same from a trusted lender. As a borrower, you can easily calculate the interest outgo using an EMI calculator. For the calculator, a borrower needs to fill up the details regarding the principal amount, repayment tenure and the applicable rate of interest. Filling in these details will let the calculator approximate the EMI calculation. 

Alternatively, there is a universal formula that can be used if the EMI calculator results are not trustworthy. The formula for finding out EMI liability is E=[P X r X (1+r)^n] / [(1+r)^n-1]. 

The ‘r’ corresponds to the home loan interest rate applicable.

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Calculation of effective interest rate

The interest rate that is added on with the loan principle is a sum of the base and markup rates. Before adding on the interest outgo, it is important to know what these rates are.

• Base Rate: The base rate is the standard rate set by banks for lending loans. It is applicable for all retail loans and is subject to changes.
• Markup Rate: This is a small percentage of the amount added to the base rate for getting the effective interest rate.  

However, the MCLR has been mandated by the Reserve Bank of India for computing the lending rate. It has essentially replaced the conventional base-markup rates system. MCLR or marginal cost of funds based lending rate has brought to the banks and NBFCs the much-required flexibility in publishing their rates. The interest rate can thus be fixed only after the possible risk factors have been analysed and evaluated. Various aspects like repo rate and deposits are taken into account when considering the MCLR. This computation is comparatively lesser than the system of base rates. 

Types of interest rates

While interest rates are different for different retail loans, there are mostly two kinds of home loan interest rates applicable. 

Fixed Interest Rate: 

This is the interest rate that remains unchanged throughout the loan. The interest charges are essentially ‘fixed’ however, the borrower can switch over to the other kind of interest only after having crossed a certain tenure. There are, of course, advantages and disadvantages related to fixed interest rates.

The advantage is that a borrower is always aware of his interest outgo. The loan is, thus, protected from unforeseen fluctuations and this helps in saving a large number of finances. 

The disadvantage is that if the standard lending rates fall, your loan with a fixed interest rate will not benefit from this in any way. This is because the interest rate, in this case, is fixed and it will be so till the completion of the tenure. 

Floating Interest Rate:

This kind of interest rate is dependent on the most current lending charges issued by the banks. It is directly linked to the latest published rate of the bank. It is directly dependent on the monetary policies of the RBI and the latest lending rate revisions. 

Floating interest rates are beneficial when the standard rates go down and this means you get to save on your finances. However, it can become difficult for the borrower if the standard rates rise above the expected line. 

There are several factors one must consider before applying for a home loan. Of course, the factors viable for the lenders are different but equally important, given that these are long term loans. Most home loans are charged with 6-7 per cent interest rates.