Home Loan Interest Rates

Home loans are long-term loans availed for purchasing or constructing a home. The amount of interest to be paid on the loan is calculated based on the home loan interest rate. The interest rate is charged by the lender as a percentage of the principal loan amount, as a charge for borrowing funds. Therefore, before you apply for a home loan, estimating the overall interest liability towards the loan is vital. There are two methods to calculate this:

• Manual Calculation of Home Loan Interest Rate:

You can calculate your EMI liability and interest rate manually by using the following formula:

EMI = [P x r x (1+r) ^n]/[(1+r) ^n-1]

In this formula, P refers to the principal, r is the home loan interest rate, and n refers to the loan tenure in months or the number of instalments the borrower has to pay.

For example, if you avail loan of ₹50,00,000 at a fixed interest rate home loan of 12% for a 10-year tenure, then your EMI will be calculated as under:

For interest rate, 12% p.a. = 0.01 (12/100/12)

10 years = 120 months
Thus,

EMI= ₹5000000 x 0.01 x (1+0.01) ^120] / [(1+0.01) ^120-1 = ₹71,735

The total amount payable will be ₹71,735 * 120 = ₹86,08,257. The principal loan amount is ₹50,00,000, and the interest amount will be ₹36,08,257.

• Using Online EMI Calculator:

A home loan EMI calculator helps you check home loan interest rates easily and figure out the interest you will need to pay with your home loan. To arrive at a result after the completion of mathematical calculations, you will need to enter the following details on the calculator:

• Home loan amount
• Home loan interest rate
• Loan repayment tenure

After filling out the required details in the fields provided, click ‘Calculate.’ You will see a detailed breakup of your loan mentioning the amount payable towards interest. The online EMI calculator is free to use.

The effective interest rate is the full cost of borrowing. It considers the effect of compounding interest, which is typically ignored while quoting the nominal or stated rate.

The applicable home loan interest rate has two components - the markup rate and the base rate. A borrower needs to pay a combination of the two. Let’s delve deeper into the two components for a better understanding.

• Base Rate : The base rate refers to the standard lending rate of the bank. It applies to all retail loans. The current home loan interest rates change frequently based on multiple inputs.
• Markup Rate : This is a small percentage added to the base rate to estimate the Effective Interest Rate (EIR) for a specific type of home loan. It varies for different types of home loans.

The formula for calculating the Effective Interest Rate is as follows:

Effective Interest Rate = Base Rate + Markup

Or,

Effective Interest Rate: r=(1+i/n) ^ {n}-1}

Where n is the number of compounding periods, and i is the annual interest rate.

After April 2016, the Reserve Bank of India (RBI) has mandated a new method for computing lending rates to replace the base rate system. This method is known as the Marginal Cost of Funds based Lending Rate (MCLR).

As per the mandate, banks must fix the home loan interest rate after considering the lending risk to borrowers. It considers several factors like deposits, repo rate, etc. As a result, the MCLR method calculates a lending rate slightly lower than the former base rate.

Housing loan interest rates are of two types - fixed interest rate and floating interest rate. Here’s a brief understanding of the two:

• Fixed interest rate on a home loan : If you opt for a fixed home loan interest rate, you must pay the same rate throughout the loan tenure. It helps you know the repayment amount before signing the loan agreement. Thus, you can plan your repayment schedule better and aid in the management of your finances.
• Floating interest rate on home loans: These housing loan interest rates fluctuate and change over the loan tenure. The floating interest rate on home loans varies depending on the benchmark rate associated with housing finance.

• If you prefer stability, are averse to risks and have a fixed financial plan, a fixed interest rate on a home loan would be better. Also, this type of interest rate is suitable if one expects the interest rate to increase.
  However, you can be at a loss if the circumstances indicate the chance of a decreasing trend in home loan interest. One must remember that a fixed interest rate on home loans is slightly higher than a floating one and will not reduce even if the market declines.
• On the other hand, if you have a bigger risk-taking appetite and a flexible financial plan, you may opt for a floating interest rate. If you expect the interest rate to fall in the future, a floating interest rate is preferable.
  However, this type of interest rate may not be suitable during high market volatility since there is a risk of interest rates rising. This could lead to increased interest accumulation over time.

Several factors influence the home loan interest rates. A borrower must know about these factors as they affect the loan EMI as well as the time required for repaying the loan. Any change in the interest rate leads to either a change in your monthly repayment amount and/or the tenure of your loan.

• Type of interest rate : A home loan is available at two interest rates – fixed and floating. A fixed interest rate does not change throughout the loan tenure. On the other hand, a floating interest rate fluctuates with policy rate changes made by the RBI. An increase in RBI’s repo rate or key policy and market competition increases the housing loan interest rate and vice versa.
• Loan tenure or repayment tenure : The home loan interest rate does not change even if the loan tenure changes. But for a longer tenure home loan, the total interest outgo works out to be more than a lower tenure loan.
• Loan-to-Value (LTV) Ratio: It is the percentage of the property value that is eligible to be financed through the loan. A higher ticket size loan means a higher loan amount, which in turn means a higher EMI. Similarly, a larger down payment can bring down the loan amount and lower the EMI.
• Borrower’s job profile: Individuals with stable incomes are considered low-risk, attracting low interest rates.

A home loan interest rate is important for selecting the right lender. This, in turn, has an impact on your monthly finances. Hence, below are a few tips to help you reduce your loan burden on your current home loan interest rates.

• Opt for a higher down payment
• Increasing your monthly EMI
• Reduce your home loan tenure
• Opt for a home loan balance transfer facility and shift your home loan a bank that offers a lower interest rate than your existing home loan interest rate. For instance, you could consider, Axis Bank, which offers competitive home loan interest rates and an easy option to transfer your home loan in a seamless manner.

Here are a few tips to reduce the interest rate burden on your home loan:

• Opt for a higher down payment
• Try securing a good credit score; ideally, a score above 750 is preferred by the borrowers.
• Apply for joint home loans.
• Increase your down payments, reducing your loan burden and lowering your interest rate.
• Go for shorter-tenure loans