Understanding the Concept of Home Loan Interest Rate in India

by MyMoney Mantra FinTech (Financial Technology)

Finding a place that you can call your home, is nothing less than a dream come true. However, like most things in life, this dream comes with a price tag and a heavy one at that. So much so that you will be compelled to apply for a Home Loan for the same.

For a first time home buyer, understanding the nuances of a Home Loan can be quite daunting, primarily due to numerous variables involved in the process. It is for this very reason that we will be laying down all the aspects that you must have a close understanding of so that you can acquire a home loan that is the most advantageous to you.

Interest Rates and Eligibility

More often than not, the Home Loan interest rates are determined on your eligibility for the same. The lower your ability, the higher will be the rate of interest.

To qualify for a low-interest loan, ideally, you must have a credit score of 750 or above. This assures the lender of your financial discipline and your ability to repay the loan. However, if your credit score is not so impressive, you may be required to pay a higher rate. Besides, if your score is lower than 650, you may even be denied the loan altogether.

Even if your lender is willing to approve the credit in this situation, you will be charged an exceedingly high rate of interest.

Then again, your income, as well as your professional stability and growth in the coming years, play a significant role in determining the cost of your Home Loan. For instance, as a professional with your practice, you may be offered a lower interest rate, as against a salaried individual with little potential for a substantial rise in income.

Moreover, if you are in your prime years, say between the age of 35-50 years, you will be offered the credit at a comparatively nominal rate, as against an individual who is about to retire. The math here is simple, the more the earning capacity of the individual, the higher are the chances of hassle-free repayment, and hence, lower the interest rate.

Interest Rates and Economic Conditions

Numerous factors such as the rise in demand for real estate, the increase in purchasing power of the common man, as well as the fast-paced urbanisation, all contribute in the determination of the interest rates on Home Loans.

The Government of India encourages the citizens to purchase residential properties and therefore takes every possible effort to keep the interest rates on the lower-end. The interest rates prevailing today are lower than the ones charged ten years back.

That being said, changes in the Reserve Bank of India (RBI) Policies pertaining financial tools such as Cash Reserve Ratio, Repo Rate, and Statutory Liquidity Ratio also has a direct impact on the interest rates.

Fixed and Floating Rates

A fixed interest Home Loan is usually availed at a comparatively lower rate and is hence preferred by many. However, such an investment implies that you will be required to pay EMIs (Equated Monthly Instalments) of the same amount for the entire tenure of the loan, without any changes.

A floating rate interest loan, on the other hand, is availed at a comparatively higher rate. It is due to the reason that in this loan type the rate of interest that you need to pay will keep changing with the market conditions. Hence, if the markets improve, or the RBI lowers the rate, you will derive the benefits of the same and will be required to pay smaller EMIs.

It is best that you discuss both of these loan types with your lender, and opt for the one which best suits your needs.

Home Loan Balance Transfer (HLBT)

If your home loan EMIs have started putting you in a cash crunch, it might be time for you to look for refinancing your mortgage. This can be done by transferring the loan to a lender who offers a lower rate as compared to your Current Home Loan Interest Rates. In some cases, you can even get access to a top-up loan during the process of HLBT, which can help you meet other goals such as interior designing, appliance purchase or home remodelling.

However, we recommend you opt for this facility in the early years of your Home Loan only, as this is the time when the more significant part of your EMIs goes towards the interest.

We hope that you now have a clear picture of almost all the aspects related to a Home Loan. We strongly suggest you choose a Housing Loan that is not only offered at a low-interest rate but also offers you a hassle-free Home Loan Balance Transfer facility!

Also Read: How Are the Stamp Duty Rates Decided in a Property Transactions

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