Becoming a proud owner of a house is a dream for many Indians. It has become a sign of financial stability and status in Indian society. But buying a house without applying for a home loan is almost unheard of. That said, most people still don’t fully understand how housing loans work, especially their interest rates.
In this blog, we will analyse the factors that determine your housing loan’s interest rate and understand the RBI rate of interest for home loans.
How do banks calculate interest rates on home loans?
Financial institutions usually set a minimum rate for their home loans and increase the rate for individual borrowers based on their risk assessment. Here are the factors that determine the minimum rate –
1. The RBI housing loan interest rate
Financial institutions borrow money from depositors at a particular interest rate and lend it at a higher rate to make money. When there is a shortage of funds to lend, they turn to the Reserve Bank of India.
The RBI lends money to these financial institutions at a centralized rate called the repo rate. This is also the RBI rate of interest for a home loan. The financial institutions, in turn, lend to their borrowers at a rate higher than the RBI rate of interest for a home loan. So your minimum housing loan rate is roughly calculated as follows:
Starting interest rate = RBI repo rate + lender’s markup
This lender’s markup component can vary for different lenders. This is why you see a difference in the interest rates they charge.
2. Fluctuations in the RBI rate of interest for a home loan
Now we know how the RBI housing loan interest rate impacts your interest payouts. But this interest rate is not constant. When you opt for a fixed-interest rate loan, RBI repo rate fluctuations do not affect your home loan EMI. But with a floating-interest rate loan, any changes in the RBI housing loan interest rate will also reflect on your loan’s interest rate, increasing or decreasing your EMIs. Financial institutions usually have a reset or waiting period before this change is reflected on your home loan.
For example, if your current EMIs are paid out at 8.5%, and the RBI reduces its repo rate by 35 base points, then your interest rate would also fall by 0.35% after the reset period, which is usually three months. This means that if you’re paying the same EMI every month, your interest component will decrease, and the principal repayment amount will increase, thus saving you money in the longer run.
3. Individual factors affecting your interest rate
Lenders may not always let you borrow money at the minimum rate they offer. Depending on your personal details and the property’s profile, they may charge a higher rate.
Some factors that affect your loan’s interest rate include your income, repayment capability, credit history, the property’s location, type, size, legal agreements, approval status, etc. You can easily finance a fully-approved apartment from a reputed builder in a prime location with a housing loan at lower rates. Similarly, a good credit history and a stable and high income can lower your risk profile and, thus, the interest rate.
Other factors, like loan amount, loan tenure, your age, co-borrowing, other financial commitments, etc., also affect your interest rate. You can use a home loan interest rate calculator to determine your potential EMIs.
How to increase home loan eligibility in 2023?
Let us look at some ways to enhance your home loan eligibility:
Improve your credit score
Improving your credit score is an excellent way to increase your home loan eligibility. You can do this by paying off existing debts, making timely credit card and other EMI payments, etc.
Get a co-applicant
If you apply for a home loan with a co-borrower who has a good credit score and repayment capacity, your home loan eligibility can increase considerably.
Fund the down payment
Lenders usually only cover up to 75-90% of the property’s value. You have to bear the rest. So if you plan on buying a house, start investing and saving to finance your down payment comfortably without additional loans. Making a higher down payment also increases your eligibility for a home loan.
To conclude
A home loan is a long-term commitment that requires careful research and planning. You can also use a home loan interest rate calculator to skip the overwhelming calculations and determine your potential EMIs quickly. Most financial institutions have an online home loan interest rate calculator you can use to make an informed decision. This helps you plan your finances and manage repayments comfortably.
At Tata Capital, we offer the best home loan options at competitive interest rates to help you buy your dream home. Apply for a home loan more!
30 March 2023
5 mins read
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