Your home loan interest rate plays a significant role in determining your monthly instalments. In India, interest rates typically range from 8% to 12% per annum, depending on the lender and loan amount. Let’s say, you searched for Home Loan interest rate online, you may observe that it starts from 8.50% p.a.
Careful planning is essential to avoid paying more than expected. To keep costs low, focus on reducing your interest rate. A few effective tips can help you repay your home loan more quickly and hassle-free.
Factors Affecting Home Loan Interest Rates
Several factors influence the interest rate. These factors apply differently depending on the lender:
- Marginal Cost of Funds-based Lending Rate (MCRL Rates)
This is the minimum interest rate banks can charge on loans. A loan linked to the MCLR adjusts its interest rate based on the bank's prevailing MCLR. Banks consider operating costs, funds, and profit margins to determine the loan rate.
They also need to comply with the Reserve Bank of India's guidelines.
- Credit Score
This number ranges from 300 to 900 and reflects the borrower's creditworthiness. Lenders view scores above 700 as low risk. A lower score, typically below 500, signals higher credit risk. Lenders may mitigate the increased risk associated with borrowers who have lower credit scores by charging them higher interest rates.
- Location of the Home
The location of your property is a significant factor in determining the interest rate. Areas with good amenities and connectivity tend to have higher resale value, resulting in lower interest rates. Locations with poor connectivity usually attract higher rates.
- Income Status
Lenders view borrowers with stable jobs as low-risk, often offering them lower interest rates. On the other hand, those with irregular income are seen as higher risk and may be charged higher interest rates.
- Loan Tenure
Loans with shorter tenures come with higher EMIs but lower interest rates. Conversely, longer-tenure loans have lower EMIs but higher interest rates.
Home Loan Interest Rate Calculation
It is essential to calculate the interest rate, as you will be committed to it for a longer period compared to other types of loans. To calculate it, follow these steps:
- Open the Bajaj Housing Finance Home Loan EMI Calculator
- Enter the details of your loan amount, interest rate, and tenure
- After entering the details, you will see your EMI, total interest, and total payable amount
To calculate the total interest rate and EMI manually, you can use this formula:
EMI = [P x r x (1+r)^n]/[(1+r)^n-1]
Note that P is the principal amount, r is the rate of interest, and n is the number of instalments or tenure.
How to Reduce Home Loan Interest Rates
Your monthly instalment and interest rates have a significant impact on your budget. Minimise your repayment amount by using the following strategies:
- Go for a Shorter Tenure
Selecting a shorter repayment period, despite the increased monthly payments, can save you money on interest in the long term. Use a loan calculator to find the right balance between EMI amount and loan duration based on your financial situation.
Always make sure to pay on time to avoid incurring late payment fees.
- Opt for the Right Prepayment Option
Choose a financial institution that allows you to make partial payments. Most lenders offer this option after a certain period. It is even better if there are no foreclosure charges. Partial payments reduce the principal amount, which in turn lowers the interest rate.
- Compare Before Committing
There are numerous lenders offering home loans with competitive interest rates. You might have looked for Bajaj Finance Home Loan. Take your time to research them online and select the one that suits you.
- Higher Down Payment
Opt for a higher down payment instead of the minimum required amount. This reduces the principal, which ultimately lowers the interest rate.
- Go for Floating Interest
Lenders typically offer two types of interest rates: fixed and floating. Fixed rates remain unchanged throughout the loan tenure. Floating rates, however, fluctuate according to market conditions. Floating rates are usually more cost-effective than fixed rates.
Frequently Asked Questions
How to get the lowest home loan interest rate?
Improving your credit score will help you get a better deal on your loan’s interest rate. Opting for a shorter tenure can also lower the interest rate. However, calculate the monthly instalments carefully before choosing the tenure.
Should I reduce my home loan interest rate or EMI?
To reduce the EMI, consider selecting a longer loan tenure. But this may result in a higher interest rate.
Disclaimer: No Business Standard Journalist was involved in creation of this content