Home loan interest rate primarily depends on the lender you are applying with. The RBI states that financial lenders are permitted to charge their borrowers a margin plus a risk premium besides the existing external benchmark rate. So, you have to note that the final rate will be dependent on the risk premium that is related to your CIBIL score for home loan as well as other factors. That being said let us take a look at the different types of home loan interest rates and how to opt for a suitable current home loan rate.
Different Types of Home Loan Interest Rates
Generally speaking, there are two types of interest rates offered by home loan lenders – fixed and floating interest rates.
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Fixed Interest Rates
For fixed home loan interest rates, the rate of home loan interest charged on housing loans remains constant all through the tenor of the loan. As such, the loans have constant EMIs, permitting a borrower to preplan the repayment. Fixed-interest home loan interest rates are ideal when you expect the market rates to go up in the near future. But, if the market interest regime drops, you may have to pay a higher home loan interest which results in higher EMI obligations. Based on the type of home loan, housing loan interest rates could be fixed for the entire tenor or a part of it, per the home loan lender’s policies.
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Floating Interest Rates
A loan under a floating regime has a home loan interest rate that keeps altering throughout the home loan tenor. It varies with changes in market conditions and the underlying external benchmarks like the repo rates of the Reserve Bank of India. When the interest rates go up, so does the home loan repayment amount, and vice versa.
The floating home loan interest rate is made out of two components: spread and index. The index indicates the measure of home loan interest rates based on the benchmark lying underneath like the repo rate. The spread, on the other hand, is the extra amount charged by a financial institution for covering credit risks as well as profit markup.
For example, if the underlying index is 6% and a financial institution decides on a spread of an extra 2%, the applicable lending rate is going to be 8%.
Floating home loan interest rates are ideal when market interest rates are going down. If, however, the standard home loan interest rates go up, so will the payable home loan EMIs.
Factors that Affect Home Loan Interest Rates
The final rate presented to a borrower is always solely at the discretion of the financial lender. However, there are a few housing loan eligibility criteria that can impact the home loan interest rate.
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Benchmark Rate of Lending
Financial lenders can have several kinds of home loan benchmark lending rates. Most financial lenders follow RBI’s repo rate as an external benchmark while NBFCs use the PLR (Prime Lending Rate) for determining their home loan interest rates.
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Credit Score
The credit score permits financial lenders to study any applicant’s debt repayment records and their overall creditworthiness. A high credit score indicates that the borrower is more likely to repay their loan on time. Hence, the lender can charge them a relatively lower home loan interest rate. In case, the credit score is on the lower end of the spectrum, one can still enhance their scores by following the leading practices.
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Your Income
Lenders typically assume lower credit risks when borrowers have a stable source of income. That is why salaried home loan applicants at a reputable firm tend to get better interest rates when compared to self-employed borrowers.
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Location of Property
The condition, location, age, and available amenities of a selected property help determine its resale value and, thereby, the interest on any mortgage loan. A higher resale value makes a property more lucrative for the lending institutions, leading them to offer lower home loan interest rates.
How to Calculate Current Home Loan Interest Rates?
Following are the different methods of calculating the interest rate of a home loan:
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Flat Rate Method
Via this method, a user calculates the home loan interest rate on the original home loan principal amount. For instance, if one borrows a housing loan with a tenor of say 20 years, the borrower will be paying a fixed interest rate for the whole tenor.
Via this flat rate method, any user can calculate the EMI with the following formula:
- EMI = (Loan principal + Interest)/ loan tenor in months.
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Reducing Balance Method
This method calculates the home loan interest rate only on the outstanding amount. Via the reducing balance method, home loan interest is not charged on the home loan principal component paid through EMIs. As a consequence, the outstanding home loan balance gets lowered with time.
A user could calculate the EMI using the reducing balance method with the following formula:
- EMI = [P x r x (1+r)^n]/[(1+r)^n-1]
Here, P is the principal whereas r is the rate of home loan interest, and n stands for the number of home loan installments.
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Using a Home Loan Calculator
Financial institutions typically have their EMI calculators that facilitate the seamless calculation of home loan EMIs and a detailed breakdown of home loan interest payments. You can take the help of any standard home Loan EMI calculator for calculating the monthly as well as annual EMIs. Simply enter the home loan amount, home loan interest rate, and tenor, and you are going to get the EMI value.
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Using Excel
Calculating home loan interest rates using Excel is easy. You need a formula and the corresponding values of the attributes.
The formula to use in Excel is as follows:
- = RATE (PMT, NPER, PV)
This is popular as the RATE function in Excel. The rate stands for the home loan interest rate. Whereas, NPER stands for the number of home loan installments, while PV denotes the whole loan principal amount or the present value.
You will have to enter the values to get the desired result. You must remember to enter the correct currency symbol when feeding in the home loan value and the percentage symbol when entering the current home loan rates. If you are calculating the home loan interest rate, you are going to get the result in percentage format.
Concluding Thoughts: Tips on How to Get Lower Home Loan Interest Rates
Take a look at some tips and tricks you can follow to avail of lower interest rates on home loans:
- Maintain a good credit score, ideally 750 or higher, to secure the most favorable home loan interest rates.
- You can avail of a joint home loan in India with a spouse to secure a lower home loan interest rate.
- If your current financial lender is charging a higher interest rate, you can opt to do a home loan balance transfer with another financial lender offering a comparatively lower interest rate.
