Housing loan is a type of credit facility that is extended to the borrower for the purchase, renovation, construction or extension of a house. It is the most useful product offered by various financial institutions to fulfill the housing needs of individuals who aspire to live in their own house. Individuals, who take up the loan, repay the principal amount along with the interest charged on it. Interest is a certain percentage of principal that the lender charges from a borrower. The housing loan is generally taken for a period of 20-30 years. In the said time frame, lenders can take out a massive chunk of the payment from your pocket if the interest rate is steep. Higher the interest rate, more will the money go out of your pocket and vice-versa. In the existing scenario, the interest rates range from 8.60%-9.50% p.a. across many public sector banks in India.
In the case of fixed rates, the rate of interest remains the same throughout the tenure of a home loan. While the interest rates are in for a constant change with a floating rate mechanism in place. Based upon the time-to- time changes in lending rates induced by the market conditions, the rate of interest undergoes a change. Normally, housing loans are offered on floating rates to the borrowers.
Depending upon the setting of the interest rate by a lender, the amount of Equated Monthly Installments (EMIs) payable from your pocket will be determined. The EMIs form a portion of both interest and principal amount that accrue on a loan.
The Reserve Bank of India (RBI) had slashed repo rate, the rate at which the central bank lends to commercial banks, by 125 basis points (bps) from Jan 2015 to March 2016. But banks cut their lending rates by only 50-60 bps, accounting for not even half of the repo rate cut by the RBI.
To ensure effective transmission of rate cuts to the borrowers by the banks in the form of lower lending rates, the RBI came up with a methodology, namely Marginal Cost of Lending Rate (MCLR), in place of base rate regime for floating rate housing loans disbursed on or after 1 st April, 2016. However, base rate still applies on loans before the said date. Those who are under the base rate can also be benefitted from lower interest rates by switching to MCLR. However, there is no provision of shifting back to base rate once the switch to MCLR is done.
Banks calculate the MCLR based on the marginal cost of funds that indicate the interest rate at which they borrow. Other factors that determine the MCLR include return on equity, operating costs, tenor premium and cash reserve ratio (CRR), a cost that banks have to bear while keeping the cash reserves with the RBI. Lenders can finance housing loan at either MCLR or add a mark-up to it. They are mandated to publish MCLR each month subsequent to its review on a quarterly basis. Moreover, the lenders are required to mention the dates on which the resetting of interest rate has taken place. You can avail a loan with reset rates linked to the date of either MCLR review or sanction. The interest rate chargeable to a borrower will continue to apply till the next rate reset date.
return on net worth. Based on the points mentioned below, the calculation of the marginal cost of funds is done.
(a) Interest rate offered by banks on deposits like savings, foreign currency, term deposit, etc.
(b) While borrowing from the RBI, banks incur a cost of 'Repo Rate', often called as a short-term interest rate. Moreover, the long-term borrowing rate also adds to the calculation of marginal cost of banks.
(c) Return on net worth- in compliance with the capital adequacy norms
The marginal cost of borrowings must account for a weightage of 92% of the marginal cost of funds, with return on net worth having the remaining 8%.
The housing loan interest rates are greatly influenced by a host of factors such as income, loan amount, tenure, credit score, to name a few. Below are the factors that you should look before negotiating with the lender for a better interest rate.
Income- The setting of interest rates, to a larger extent, is contingent upon the income of the borrower. Banks keep their eyes firmly on the salary drawn by the working class or the revenue generated by self-employed to fix the interest rate on a housing loan. Other factors that play their parts are the industry in which you work and the employer's name. If you have an income that can easily bear the pressure of EMIs, then you can bargain for a better interest rate on your housing loan.
Loan Amount- The quantum of finance also plays a vital role in the setting of interest rates. The scope for lower interest rates is more in the case of higher loan amount compared to lesser one. When the loan amount is higher, invariably the interest rates get lowered by the lenders.
Loan Tenure- The term chosen by the borrower also impacts the interest rate. The longer loan tenure more often than not lowers the interest rate. You need to check with the bank as to whether the longer tenure is bringing down the interest rate or not. If it is the case, then go ahead. Else shop for a lower rate at other lenders.
Loan Type- The rates are subject to change based upon the type of housing loans you are availing. Housing purchase loans can be offered at a lower interest rate compared to home improvement loans.
Type of Interest Rate- Floating rates are generally cheaper than the fixed rates.
Profession- The interest rate for salaried and self-employed can show variation based on the level of risks involved in the said professions.
Property Location- If the property, you want to purchase, is located in a mainstream area and bought from a reputed developer, chances are high that the interest rate can get lowered in your case.
Credit Score- Last but not the least, it's the boss credit score that will dictate the interest rates offered by the lenders on a loan. Doesn't matter how higher the income you have if the credit score is low, the interest rate could go up substantially.
|Banks||Interest Rate (p.a)|
|State Bank of India (SBI)||8.35%-8.75% (For Women)
8.40%-8.80% (For Others)
|Punjab National Bank (PNB) HFL||8.50%-8.70%|
|Bank of Baroda (BoB)||8.35%-8.85%|
|Bank of India (BOI)||8.65%-8.70%|
|Indian Overseas Bank (IOB)||8.65%-8.90%|
|Punjab & Sind Bank||8.75%-9%|
|United Bank of India||8.75%|
|Oriental Bank of Commerce(OBC)||8.60%-8.70%|
8.35%-8.50% (for women)
8.40%-8.55% (for others)
8.35%-8.85% (for women)
8.40%-8.85% (for others)
|Kotak Mahindra Bank||8.65%|
8.35%-8.50% (for women)
8.40%-8.55% (for others)
The interest rate calculator or so to say EMI calculator will show the monthly installments you need to be ready with for the smooth repayment of a housing loan. In addition, you can get to know the interest payment amount as well as the overall outgo for each year of the loan term. If you know the EMI in advance, you can plan better and have a seamless repayment experience. The EMI is calculated with the help of a formula stated below.
EMI=[P x R x (1+R)^N]/[(1+R)^N-1]
Where, P= Principal Amount
R= Interest Rate
N= Number of Monthly Installments
Suppose you have finalized a property and got a 20-year housing loan of ₹25 lakhs at an interest rate of 8.60% p.a. You can look below to find the EMIs, interest outgo and total payment on the said loan.
Table Showing Home Loan EMI, Interest Amount and Total Repayment Amount
|Loan Amount (in ₹)||Tenure (in Years)||Interest Rate (in p.a.)||EMI (in ₹)||Total Interest (in ₹)||Total Payment (in ₹)|
The calculator shows the break-up of principal & interest repayments along with the outstanding balance at the end of each year till the loan term. Take a look at the amortization calculator below to find out the repayment at each year below.
|Year||Principal (in ₹)||Interest (in ₹)||Outstanding Balance (in ₹)|