Owning your own home ensures security and promotes financial stability. Thus, many people opt for mortgages today to become permanent homeowners with a guaranteed roof over their heads at all times. The interest rate on your loan refers to the percentage your lender charges you on the principal amount.
Mortgages are paid back through equated monthly instalments or EMIs. The interest the lender charges determines how much you pay against your loan every month. This interest rate differs depending on numerous factors. It also depends on the type of interest rate you opt for.
- Types of Home Loan Interest Rates
There are two types of interest rates on mortgages: fixed and floating.
- Fixed Interest Rate
As the name suggests, the fixed interest rate of home loans does not change during the loan’s tenure. Depending on the terms and conditions, your lender may allow you to switch to a floating rate system after a certain amount of time.
While fixed rates offer the security of always knowing how much you need to pay, if the market’s lending rates fall, causing interest rates to dip, you will still be paying the same amount. Your rate is not flexible per the market.
- Floating Interest Rate
Floating rates are more flexible, adjusting based on the market rates of competitors. The current rates are determined by multiple factors, allowing for more competitive rates. Most lenders offer this type of interest rate for home loans, as they are for longer tenures.
The main advantage then becomes, if the market rates fall, your interest charges also reduce. However, the other side of the same coin is the disadvantage – if the standard rates increase, your interest charges also increase.
While fixed versus floating rates are significant determinants in your interest rate, lenders use several other factors to decide the ideal interest rate on your mortgage. Each lender will have a certain minimum interest rate they can offer based on their policy. However, the final home loan interest rate offered to an applicant will depend on his/her eligibility, repayment capacity, creditworthiness, etc.
- Factors Determining Housing Loan Interest Rates
There are several things lenders take into consideration before issuing a loan. They need to ensure that when they give you the money, you are in a position to repay your EMIs until loan maturity. Thus, when you go to a bank or a non-financial institution for a loan, they ask for the following information:
- Income: Candidates with a stable job / business and a high income along with very low or no existing EMIs may be rewarded with a lower interest rate since they are more dependable.
- Credit Score: The lender scrutinises your credit report, analysing past and current credit. If you have a good credit score, you may get a lower interest rate.
- Location: You get a better interest rate if your home is in a prime location, or you buy it from a reputable builder or agency.
- Principal Sum: The higher the loan, the lower the interest rate. However, this will be taken into account in conjunction with your repayment capacity.
- Loan Type: While standard loans come with standard rates, specialised loan plans may have higher rates.
Based on these factors, lenders determine the Effective Interest Rate (EIR) – the combination of the standard base interest rate and the additional markup interest rate, depending on the type of loan you choose. If you are curious about your interest rate, you can calculate your EMI online quickly and easily.
- Comparing Current Home Loan Interest Rates
In April 2016, the Reserve Bank of India (RBI) mandated that banks and other lenders adopt the Marginal Cost of Funds based Lending Rate (MCLR). This mandate led to the Effective Interest Rate (EIR), which combined the previous base rate with a markup rate depending on the loan type.
The goal of this was to improve transparency, accountability, and flexibility in the published rates. Part of the mandate was to fix the interest rate based on risk factors to the borrowers. The MCLR calculator ensured lower interest rates.
Comparing interest rates is essential for the best plan. However, apart from comparing the latest rates, you should also keep certain other pointers in mind while choosing your lender:
- Ensure lender reliability by looking into their history.
- Make a down payment as high as you can to keep your loan amount, and by extension, EMIs low.
- Read the fine print and understand the terms and conditions to protect against future shocks.
- Understand any charges, and ask for a list in writing.
Keeping such factors in mind and having all the necessary documentation ready ensures that you are much better prepared for your mortgage. You can easily apply and get all the benefits and security you deserve.