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Tata Capital > Blog > Loan for Home > Check out how to calculate interest rate on home loan

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Check out how to calculate interest rate on home loan

Check out how to calculate interest rate on home loan

The primary concern of anyone looking to purchase a house is the home loan interest rate. It is one of the major factors that influence the affordability and overall cost of the loan. 

Higher interest rates have a direct impact on the EMI you, as a borrower, would pay, and therefore reduces your ability to avail a large home loan. On the other hand, a lower interest rate will bring down your EMIs and possibly even allow you to plan for a shorter repayment tenure. 

Want to know how to calculate interest on home loan? You will have to first decide whether you want to choose a fixed or floating interest rate. 

With a fixed-rate loan, the interest rate remains the same through the loan tenure. A fixed-rate mortgage provides a sense of certainty. You know exactly how much your home loan EMI will be through the tenure. This allows you to budget and plan your finances accurately.

A fixed-rate loan is also a good option if you expect the interest rates to rise in the foreseeable future.

Fixed Rate for Home Loan

On the other hand, a floating rate loan, also known as ‘adjustable-rate home loan’, is linked to the market’s benchmark interest rate (MCLR). It changes according to the prevailing economic conditions.

Additional Read: What Is MCLR Home Loan?

The interest rates on such a loan are reviewed periodically. The reviews may happen quarterly, half-yearly or annually. In case there is a change in the interest rates, the same is adjusted with the home loan tenure. If the interest rates drop, your loan tenure will be shortened and vice versa. This approach is used so that your EMI isn’t revised frequently, which can further impact your overall budget.

A floating-rate loan is also a good option if you expect the interest rates to drop in the future.

The other factors that impact the home loan interest rates are:

Monetary policy

Changes in the Reserve Bank of India’s policy have a direct impact on the lender’s cost of funds. If the RBI, for example, reduces the repo rates, the cost of funds become cheaper for the financial institution and, in turn, for home loan customers.

Credit score

Credit Score for Home Loan

Your credit score reflects your financial behavior, and a good credit score can help shave off some points off the interest rates.

Financial liquidity

When financial institutions have more liquidity, they lend money for cheaper, as was the case after demonetization. Similarly, a higher rate is levied if there is a shortage of money in the economy.

Calculating EMI

If you would like to manually calculate your monthly EMI before applying for a loan, you can use the following formula:

EMI= [P x R x (1+R)/\N]/ [(1+R)/\N-1]

P - Principal or total borrowed amount 

R - Applicable rate of interest on a monthly basis

N - Tenure of the loan in months

Additional Read: How Can A Home Loan Calculator Help You Plan Your Finances Better?

You could eliminate any miscalculations by using Tata Capital’s home loan EMI calculator available online. While you are at it, check out the super affordable home loan interest rates, easy repayment terms and much more that this trusted lender has to offer, so that your financial planning is absolutely foolproof.

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