Home Loan Interest Rate

How to Calculate Interest on Home Loan?

In general, home loans are long-term loans and it is important to figure out your overall interest liability towards the loan in the first place.

You can calculate the same using one of the two methods listed below:

• EMI Calculator - You can calculate the interest amount applicable to your home loan by simply using a home loan EMI calculator. You will be required to fill up the fields provided on the calculator with the following details –Once the details have been fed, you can click on the ‘Calculate’ button to get a detailed breakdown of your loan including the amount payable towards interest.
  • Home Loan Amount
  • Loan Repayment Tenure
  • Rate of Interest
• EMI Calculation Formula: Alternatively, you can also use the following formula to calculate your EMI liability for your home loan - EMI = [P x r x (1+r)^n]/[(1+r)^n-1]    Wherein, P is the Principal, r is the rate of interest, and n is number of instalments or loan tenure in months.
  

How to Calculate the Effective Interest Rate?

The applicable interest rate on a home loan consists of two components, the base rate and the markup rate. The combination of the two is what you will be paying on the loan. Let's explore these components to give you a better understanding.

1. Base Rate - It is the standard lending rate of the bank, applicable for all retail loans. This rate is subject to frequent changes on the basis of multiple inputs.
2. Markup - This component of a small percentage is added to the base rate to arrive at the EIR (Effective interest rate) for a specific type of home loan and varies from one type to another.
3. Effective Interest Rate (EIR) = Base Rate + Markup
4. From April 2016 onwards, the Reserve Bank of India (RBI) has mandated a new method for computing lending rate to replace the base rate system. The Marginal Cost of Funds based Lending rates (MCLR) is aimed at bringing more accountability and flexibility to the way rates are published by banks and financial institutions in India. RBI mandates banks to fix the interest rate after studying the risk factor associated with lending to borrowers. It takes into account various factors involved such as repo rate, deposits etc. This MCLR-based computation works out to be slightly lower than the erstwhile base rate.

Types of Interest Rates in Home Loan

There are mainly two types of home loan interest rates charged by most banks.

1. Fixed Interest Rate:

In this system of computation, the rate remains even throughout the loan tenor. There will be no change in the interest charges since the rate remains fixed. Depending on the offer, you may be allowed to switch over to the floating rate system after completing a certain duration into the loan tenure.

1. Advantage: Since the rate remains fixed, you know how much interest charges you’re paying upfront. Your loan will be shielded from frequent rate fluctuations and will save money in a the long run if there is a hike in lending rates.
2. Disadvantage: If the standard lending rates fall, you will not benefit since the interest component remains frozen.

2. Floating Interest Rate:

The interest charges on your home loan is subject to the current most lending rates of the bank. The rate is linked to the latest published rate of the bank which in turn depends on multiple factors such as RBIs monetary policy and lending rate revisions, the bank’s response to the revision etc.

1. Advantage: The most visible perk of opting for the floating rate is that you have the advantage of being billed on the basis of the latest rate. If the rates fall, you save on interest charges.
2. Disadvantage: In rare scenarios, if the standard rates go up, the loan has to be bear the brunt of being billed a higher rate.

Note: But, the floating home loan interest rates are cheaper than the fixed home loan interest rates on the first front.

How to Apply for a Home Loan?

Step 1: Complete the Home Loan Application Form 

Commence the home loan application process by filling out the application form. Provide the following details: 

1. Personal information of the applicant (name, contact number, etc.) 
2. Current residential address 
3. Monthly income 
4. Educational background 
5. Current and previous employment details 
6. Details of the property for which the loan is sought 
7. Estimated property cost 
8. The current method of financing a home 

Step 2: Verification and Processing 

1. After submitting the form and required documents, the bank will process your application and conduct a thorough credit score check. Ensure accurate information submission, as any discrepancies can lead to rejection. 

Step 3: Loan Sanction 

1. Upon verification of submitted documents, the bank sanctions the loan. This typically takes one day to two days, pending accurate paperwork. Occasionally, an in-person verification may be required for additional information. 

Step 4: Technical and Legal Check 

1. Before disbursing the loan, the bank conducts legal and technical assessments. For under-construction properties, the construction progress and quality are assessed. Resale properties undergo scrutiny for age, maintenance, previous mortgages, and ownership rights. 

Step 5: Payment of Home Loan Processing Fee 

1. After successful verification, the applicant pays the home loan processing fee, ranging from 0.25% to 0.50% of the loan amount, to maintain the loan account. 

Step 6: Disbursal of Loan Amount 

1. Upon meeting all eligibility criteria, the applicant receives a formal agreement letter, and the loan amount is disbursed to their bank account. A complete home loan EMI schedule is provided via email. 

Determining Factors for Your Home Loan Interest Rate

When applying for a home loan, it's important to understand the factors that lenders consider while assessing your eligibility and determining the interest rate.

Since home loans involve substantial amounts, banks and Housing Finance Companies (HFCs) conduct a thorough evaluation of your credit history, repayment capacity, income, and property details. It's worth noting that lower interest rates often come with stricter eligibility criteria. Here are the key factors that lenders take into account:

1. Credit Score -  Your credit score denotes your credit history and financial track record. A good credit score indicates timely payment of EMIs and credit card bills, as well as responsible credit management. If your credit score, as assessed by CIBIL or other bureaus, is 750 or above, lenders view you more favourably for a home loan. Moreover, banks and HFCs are increasingly using the credit score to determine home loan interest rates. Applicants with higher credit scores, reflecting responsible credit behaviour, may be offered lower interest rates. Those with no or low credit scores can improve their scores by opting for a lifetime free Step-UP Credit Card, which is a secured credit card co-branded with SBM Bank India Ltd.
2. Income and Employment - Lenders take into account factors such as your income, employment type, and employer profile when assessing your home loan eligibility. Applicants with stable employment in government, PSUs, or large/reputed private sector organizations are generally preferred by lenders due to the higher certainty of job and income. Consequently, such applicants may be offered lower home loan interest rates. Conversely, individuals with irregular or insufficient income might face challenges in obtaining a home loan at a lower interest rate.
3. Loan Amount -  The amount you intend to borrow for your home loan can also impact the interest rate. Home loans up to Rs. 30 lakh usually have lower interest rates compared to higher loan amounts. Making a lump sum down payment can help reduce the overall loan burden and potentially secure a lower interest rate on your loan.
4. Type of Home Loan - Different types of home loans come with varying interest rates. Regular home loans generally have standard rates, while specialized loans like Plot Loans or NRI Home Loans may have higher interest rates.
5. Interest Rate Concession for Women Borrowers -  Some lenders offer a home loan interest rate concession, often around 0.05%, specifically for women borrowers. Therefore, it is advisable for married couples to consider a joint home loan and designate the wife as the primary applicant if it can result in a lower interest rate. Opting for a joint home loan can also increase eligibility and provide additional tax benefits.
6. Type of Interest Rate - The choice of interest rate type for your home loan affects the repayment rate. Fixed-rate home loans maintain consistent EMIs throughout the loan tenure. On the other hand, floating rates, linked to factors like Repo Linked Lending Rate (RLLR), fluctuate with changes in the lending rate. Lenders typically charge higher interest rates for fixed-rate home loans due to the increased interest rate risk involved.