Home Loan Interest Rates

Home loans are long-term loans on which a borrower has to pay interest. The interest is calculated based on the home loan interest rate. Therefore, before you apply for a home loan, it is vital to estimate the overall interest liability towards the loan. There are two methods to calculate this:

• EMI Calculator : A home loan EMI calculator lets you easily 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 you fill out the required details in the fields provided, click on ‘Calculate.’ You will see a detailed breakup of your loan mentioning the amount payable towards interest. The online EMI calculator is free to use.

• EMI Calculation Formula

If you wish, you can calculate your EMI liability and interest 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.

There are two components of the applicable home loan interest rate - 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 rate changes 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

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

The method brings more flexibility and accountability to how banks and financial institutions in India publish rates. As per the mandate, banks must fix the home loan interest rate after considering the risk associated with lending to borrowers. It considers several factors like deposits, repo rate, etc. As a result, the MCLR method calculates a lending rate that is 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:

• The fixed interest rate on a home loan : If you opt for a fixed home loan interest rate, you have to pay the same rate throughout the loan tenure. You can use the interest rate to estimate the total interest outgo and repayment liability at the beginning of the loan tenure. It allows the borrower to better plan repayment and management of finances.
  A fixed interest rate on home loans helps to combat fluctuations in the economy. Therefore, it is suitable for periods when the interest rate can increase in the future. However, you can be at a loss if the circumstances indicate the chance of a decreasing trend in home loan interest.
• Floating rate of interest: These housing loan interest rates are not fixed and change over the loan tenure. The floating interest rate on home loans varies depending on the benchmark rate associated with housing finance.
  A floating interest rate is suitable when there are chances of a fall in interest rate. However, the type of interest rate is not suitable during high market volatility since there is a risk of rising rates, and the interest rate can lead to increased interest accumulation over time.

The home loan rates of interest are influenced by several factors. A borrower must know about these factors as they affect how soon they can repay the loan. In addition, the effect of these factors is seen on your EMI as well because a change in interest rate leads to a change in the instalment amount you need to pay.

• Type of interest rate : A home loan is available at three types of interest rates - fixed, floating, and mixed. 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.
  Mixed interest rates are a combination of fixed and floating rates. At the beginning of the home loan, the borrower opts for a fixed interest rate and converts it to a floating interest rate depending on market conditions.
• Property’s location and condition : The resale value of a property depends on its location and condition. Its age also has an impact. When the resale value of a property is high, it signifies a lucrative opportunity for financial institutions. As a result, borrowers can avail of lower home loan rates of interest.
• Repayment tenure: The risk of lending increases for financial institutions when the repayment tenure is long. Thus, the housing loan interest rate is lower for a shorter loan tenure and higher for a longer loan tenure.
  The loan-to-value ratio and the benchmark rate of lending are other factors that affect the interest rate and EMI for a borrower.