RBI's recent monetary policy changes have bolstered the growth of the Indian home loan market. According to a market research firm's survey, this segment is projected to register a 22% year-on-year growth during the financial years 2021 and 2026.
Owing to current market conditions, the home loan interest rates are at an all-time low, presenting a great opportunity for borrowers to avail credit to fund their purchase of a house. However, they need to how to calculate home loan interest payment in advance to avoid facing any difficulties during repayment.
How to calculate home loan interest?
Calculating the interest payment of a housing loan requires individuals to utilise the following formula –
EMI = [P x R x (1+R) ^n] / [(1+R) ^ n-1]
In this formula, P is the principal amount, R stands for interest rate, and N is for the number of months.
Alternatively, they can use a home loan interest rate calculator for the same purpose. Additionally, using such online devices will expedite the whole process and provide accurate results.
Since the interest rate is one of the most significant parts of availing a home loan, being aware of it is crucial. It helps individuals to gauge their total debt in advance and plan accordingly. Along with that, they should also know the factors that can affect this rate to make an informed decision.
Factors that can influence home loan interest rates
A home loan makes it possible to own your dream home right now. The affordability of the loan depends on the Equated Monthly Instalments (EMI) that you will have to pay. EMIs help you pay back the principal and interest amount in a way that does not add stress your monthly budget. However, this will depend a great deal on the interest rate. There are many factors that influence the interest rate which will vary from lender to lender. Some of these factors are fixed (such as the RBI’s repo rate or the bank’s MCLR rate) but some are variable.
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Here are the top factors that can alter housing loan rates –
Monetary policy of RBI
Probably the biggest factor in deciding a home loan interest rate is the monetary policy adopted by the RBI. The apex bank controls the flow of money in the Indian economy with assistance from its two key policy rates - repo rate and reverse repo rate. These rates are altered in every monetary policy meeting with respect to the current economic condition of India.
Hence, individuals should know how the RBI rate hike can affect their home loan rates to plan accordingly.
Tenor of a housing loan also has an effect on its interest payment. Even though it is not directly related to the rate of interest, it alters the overall payment. In case you have availed a credit with a shorter tenor, you will pay less interest amount and may be able to negotiate a lower interest rate as well.
Down payment amount
Down payment is another factor that can influence these interest rates. Loan applications with a higher down payment amount are considered low-risk for lenders; thus, they can extend a better interest rate. Additionally, you can turn to home calculators to check how down payment can influence the interest rate and overall cost of a credit to purchase a house.
Location of a property
Property location also plays a part in deciding the interest rates of a housing loan. If you purchase a property in a prime location with great amenities, lenders consider it as a stable one with a higher resale value. In that case, they may offer you a better interest rate when compared to a property with poor facilities and in a remote location.
Individuals who have a stable income source are considered low-risk while those who have an unstable income source are considered high-risk. Lower interest rates are thus offered to those with a stable income, which would include salaried professionals, PSU and government employees, and those working in leading private sector firms. Doctors and chartered accountants are considered low-risk among the self-employed category.
Tenure of the Loan:
Loans with a shorter tenure attract a lower rate of interest (even if the EMIs are higher) than loans with a longer tenure (which will have lower EMIs but a higher interest rate). With a simple online home loan emi calculator it is easy to find the best tenure for your loan.
The factors listed above are the major factors that influence the interest rate on your home loan. While some of these are within your control, others are influenced by the economy. Keeping all these factors in mind when deciding on a home loan will help you get the best value loan for your budget and requirements.
Your credit profile can also influence the housing loan interest rate you are qualified for. Financial institutions take the credit score and repayment history of a borrower into consideration while evaluating an application. Therefore, individuals with higher credit scores and better repayment history can negotiate and leverage more competitive interest rates.
On the other hand, individuals can skip the hassle of meeting the eligibility norms and documentation with pre-approved offers. Applicable for existing customers, it abbreviates this application process. These offers are available on financial products like home loans, loans against property, etc. Borrowers can check this pre-approved offer by registering their contact details.
Being aware of how to calculate home loan interest rates has its benefits. The primary one being financial planning. Individuals can strategise their repayment and avoid facing any difficulties throughout the tenor. They can also talk to their lender to get the home loan queries answered before making a decision.