Blog #Home Loan Interest Rate

After deciding on going for a home loan, the next step is to step into the real estate market and conduct thorough research of all the offers and discounts provided by numerous lenders. The decisive action of choosing the best interest rate, and highest loan amount, along with the most trustworthy lender, is a tough and important one. Since this decision can impact your finances for the next 20-25 years, You should carefully consider the most convenient and financially beneficial deal. You should check how much Home Loan Processing Fees, foreclosure charges, and part-payment penalties is the lender imposing. 

Many financial institutions like Yes Bank provide different interest rates on their home loan scheme. The interest is computed using the Home Loan EMI calculator. 

There are two methods to calculate the rate - 

(i) Fixed-rate method 

(ii) Floating Rate method

The existing and new customers can opt for either of these methods to get a Yes Bank Home Loan. 

Fixed Interest Rate Method : 

People can choose to pay the same amount of monthly instalments throughout the loan tenure. The interest rate is computed before the term starts, and it remains constant till the loan amount gets repaid fully. People who do not want to take any risks with the home loan prefer to go for the fixed rate method. Since the real estate market is continuously varying, the rates may be favourable at one point and may become high when the market is down, and losses are high. The trend of the market rate is essential while choosing the Home Loan Interest Rate. If there is a certainty that the rate will not fall further beyond a specific limit, the borrower can quote a reasonable interest rate to get the best deal.

Floating Interest Rate Method : 

As the market rises or falls, the interest rate and demand for real estate get affected likewise. This is a volatile interest rate that gets calculated after each instalment is paid. It is dependent on the base rate offered by the lender. If the base rate fluctuates, the interest rate is automatically updated and revised. The floating rates are relatively cheaper than fixed rates. They start at 1%-2.5% lower than fixed interest rates. Initially, both parties decide the rate based on the market rate, and it keeps getting modified without any influence from either party thereon. 

The following table compares the floating and fixed rates over specific parameters - 

Since home loans are long-term loans and a proper financial structure is needed to keep sufficient funds to repay the amount, a fluctuating or floating interest rate can be a problem as it can either act in your support or against you. The instalments can become challenging to repay, and the borrower's savings might also get affected.

Conclusion -

Many banks offer the facility of switching from fixed rate to floating rate and vice-versa. There is an additional switching/conversion charge of around 2% of the total loan amount that the applicant should pay. Age also plays a part in deciding the type of interest rate method. Both these methods have their advantages and disadvantages, and the applicant must consider all these factors along with his financial position while making the final decision.    

Home loans can be availed without shredding sweat flexibly in numbered days from financiers. But to avail of a home loan, certain factors need to be considered and pondered over before standing before a bank.

Factors Affecting The Eligibility Criteria Of Home Loans

1) Age: Age is a significant factor in the eligibility criteria though anyone between the age of 18 and 75 can avail a loan in most banks and NBFCs, the applicant’s who are at the beginning of their career or an official who is about to retire soon have high eligibility rates as they can pay the amount soon without much hassle.

2) Income: The applicant requires a stable income or profit to become a home loan borrower. Salaried and self-employed individuals are preferred mainly by the banks and NBFCs to avail the loan. Adding an extra member of your family as a co-applicant can enhance your eligibility, as two members are better than one in paying off the debt. The minimum stable money required in their bank account to avail the loan is Rs.25,00 in most banks and NBFCs.

3) Credit score: The CIBIL score or the applicant’s credit score weighs a lot in determining eligibility. A good credit score is one above 750 and has a high chance of getting the loan. In addition, the score takes into consideration your previous loan history, and how you’ve paid your monthly payments and the kinds of loan or debt you’ve borrowed in the past. This helps the lender in assessing your repayment capability.

4) LTV and property details: Loan to Value ratio is the principal amount a bank or NBFC grants for the asset, here the home. Depending on the property’s value, bankers evaluate the money they can sanction as the loan amount. So if the property’s value is high, there is an elevated chance of getting more amount. If the loan is for buying a new house and not a loan against a house, the lenders consider your down payment capacity, and if the applicant can pay 20% or more, the chances of availing of the loan soon are high.

5) Existing debts: if the applicant has loans or debts in his/her name already and has to pay high monthly interest, the bankers hesitate in sanctioning, but if the profit or income is more than enough to cover all your loans, they approve it fast. Therefore the repayment capability of the applicant plays a major role in the approval process.

Factors Influencing The Interest Rate On A Home Loan

The applicant needs to consider the home loan interest rate a huge factor before availing of a loan.

1) Interest type: There are two types majorly in how the applicant can pay a monthly instalment. They are floating and fixed interest rates. Floating interest rate changes each month according to the financial markets, low or high, the applicant doesn’t know. Budget planning is difficult and involves high risk but paying a low interest rate compared to a fixed interest rate each month is possible. In fixed interest rates, the monthly instalment amount is fixed by the NBFC or bank, and it doesn’t vary over time. Therefore, budget planning is possible and involves low risk. A Home Loan EMI calculator on the bank’s official website or NBFC can be used to calculate the interest amount.

2) Loan term: The tenure or loan term is the period of the amount the applicant avails the loan for. It may vary from 5years - 25 years, depending on the bank and NBFC. If the tenure is long, the monthly instalment amount the applicant has to pay each month is low and vice-versa.

3) MCLR rates: Marginal Cost Of Funds Based Lending Rate is the minimum interest rate a bank can lend the loan amount at. According to the tenure, the bank or NBFC fixes a date for the applicant, and the interest rate for that year may vary depending on it. Therefore the MCLR can increase or decrease your interest rate each year and weighs a ton in affecting the monthly instalment amount.  

Also read this: Things To Consider Before And After Home Loan