What is the Interest Rate on Home Loans in India?

What is the Interest Rate on Home Loans in India?

What is the interest rate on home loans is one of the first questions that arises in the minds of those looking for availing home loans. The major reason for this question, 'what is the interest rate on home loans' comes up because the rates of home loans are one of the most crucial factors that significantly impact the overall home's cost. As home loans come with big-ticket amounts and for higher repayment tenures, even a minor difference in their rates can have a sizable financial implication, particularly in the long term. Availing a lower rate on a home loan not just helps at lowering one's EMI outgo but even the entire home loan interest cost. Thus, it is crucial that if you want to avail of a home loan, you should first consider comparing all the possible options available and then select the lowest rate on offer with other suitable terms and conditions.

Here, in this article, we will understand what the interest rate on home loans in India, the different types of interest rates on home loans available, the difference between fixed and floating home loan rates and what are the factors that impact home loan's rate is. 

What is the Interest Rate on Home Loans in 2021?

Types of Interest Rate on Home Loans in India

Fixed interest rate: Fixed rates on home loans stay the same throughout the home loan tenure, which keeps the EMI on home loans constant. Note that opting for home loans at fixed rates is a better option when the present home loan rates are very low, with an anticipation for an upward trend in future for home loans interest rates. However, in reference to the present trend of falling interest rates, HFCs/banks are providing their customers with the choice of switching to floating rates after completion of a specific time period. 

Floating interest rate: Floating rates even are addressed by the term variable interest rate. It is dependent upon the present market lending interest rates and thus may change in the course of the loan tenure. EMIs of home loans rise or fall based on the movement of the interest rate. Note that with the present trend of falling home loan rates, opting for floating interest rates is beneficial for prospective home loan applicants. 

Mixed interest rate: Mixed interest rate home loans include fixed interest rates for initial years and then switch to variable or floating interest rates for the remaining loan tenure. 

Fixed vs Floating Home Loan Interest Rates

As explained in the case of fixed interest rates, the home loan rates stay the same for the whole loan repayment tenure. This permits borrowers to estimate their overall repayment liability clubbed with overall interest cost at the starting of the loan repayment tenure. Opting for a home loan at a fixed interest rate even assists in planning repayments and managing finances efficiently. Fixed rates are suitable in the course of times when the chances of a rise in interest rate exist. However, this option is not suitable under the circumstances, which predict a falling trend in rates. Also, lenders charge prepayment fees of up to 2% of principal outstanding in case of fixed interest rate, while in case of floating rates, no prepayment charges are charged.

Unlike fixed interest rates, floating rates on home loans are variable and are prone to change over the home loan tenure owing to multiple factors. Basis the benchmark rate, which is linked to housing finance, floating rates on home loans rises or falls. Home loan applicants can opt for home loan rates when markets indicate a falling rate trend. Floating interest rates might not be suitable in the course of high market volatility because the risk linked with increasing rates exists and can lead to increased accumulation of interest over the time period. Based on suitability, home loan applicants can choose to shift from fixed to floating rates & vice versa in the course of loan repayment tenure. However, remember that fixed interest rates are generally 1 to 2.5% higher as compared to the floating rates. 

How to Calculate Interest Rate on Home Loans

There are 3 distinct ways that you can consider for calculating your home loan interest rate. Here, we will step by step mention each of the ways: 

Using interest formula

It is a manual procedure of deriving home loan interest rate through a formula: 

EMI=[P X R (1 + r) ^ n]/[(1 + r)^n-1]

Here, P stands for principal or the loan amount, r stands for interest rate, and n refers to loan tenure. 

Using excel

Simpler option is to use MS excel to calculate EMIs through ‘PMT’ function:

= PMT(RATE,NPER,PV,FV,TYPE)

Rate here is the interest rate being offered, which is divided by 12, NPER refers to the number of EMIs, PV refers to the principal amount. Both TYPE and FV must have their values set to zero.

Using home loan EMI calculator

Usage of online EMI calculators is one of the simplest ways to guarantee an error-free outcome. Here is the step.

- Enter in your loan amount in the space marked as ‘Loan Amount’

- Put in the rate of interest offered to you

- Select the loan tenure under the loan tenure field

- Click on the calculate option for the result

Factors that Impact Home Loan Interest Rates and EMI

With a home loan's repayment tenure going up to thirty years, even a slight difference in the rates can result in an excessive difference in the entire home loan's interest cost. As lenders factor in various parameters when setting one's home loan rates, having a thorough understanding of these factors can help one avail a suitable deal with the lowest interest outgo. 

Here, we will mention factors that determine one’s home loan interest rates: 

Credit score

Most of the lenders factor in the credit scores of the home loan applicants when setting their rates. As the ones with an excellent credit score of 750 and above are looked at as creditworthy, lenders too try and entice them by offering lower rates on home loans. Likewise, as the ones with a low credit score of below 750 are generally looked upon as those lacking credit discipline, lenders make up for their higher involvement of credit risk by charging them with higher home loan rates. 

Thus, ensure reviewing your credit report at least six months before you submit your application for a home loan. Doing this would give you adequate time to take corrective measures for improving your score. Also, it would assist you in identifying wrong information or clerical issues, if any, in your report, which is responsible for bringing down your score. On reporting such issues or incorrect information to the lender or bureau, the corrective report would automatically bring up your credit score. 

Loan amount

Those opting for higher loan amounts infer higher credit risk on lenders' part. Hence, the lenders charge higher home loan rates from those opting for higher home loan amounts. For instance, the home loan rate of SBI on the loan amount of up to Rs 30 lakh begins from 6.70% p.a onwards while their rates for loan amount for over Rs 30 lakh and over Rs 75 lakh begin from 6.95% p.a. and 7.05% p.a., respectively. Thus, the applicants must try to make a higher down payment as this would allow them to avail of home loans at lower interest rates. 

Type of interest rate

Home loan rates can be categorized into – fixed, floating and fixed rates. Floating rates usually fluctuate based on the changes in rate benchmark, which are adopted by the home loan lenders, while rates for fixed-rate home loans stay the same in the course of the whole repayment tenure. The home loan on mixed rate stays the same for a defined period, generally for a time period of two or three years, and after this, they change to floating interest rate home loans. As fixed and mixed rates come with higher rate risk for lenders, HFCs and banks usually charge higher rates on them from home loan borrowers for making up their losses in their interest income because of adverse change (if any) in the rate of interest regime. 

LTV ratio

A home loan's loan to value ratio refers to the proportion of the property value, which is disbursed as a loan by lenders. Note that the rest of the amount requires to be funded through your own pocket as a down payment amount. As HFCs and banks require making higher provisions in case of home loans having higher LTV ratios, compensation for such increased provisioning is done by them by charging the borrower a higher interest rate on home loans with a higher LTV ratio. Thus, as a borrower of a home loan, you should make an effort to choose a lower LTV ratio to lower your interest outgo. 

Job profile

Income sources of the home loan applicants are also considered by most HFCs and banks when setting their rate of interest. Usually, the salaried individuals are offered lower rates than those who are self-employed because of the existence of income certainty in the case of salaried. Among the salaried, PSUs and government employees are highly preferred because of the increased job stability and income certainty. After them, those working in large private companies or MNCs are generally given preference as such organizations are generally looked upon as stable with increased capability to bear economic uncertainties than other small private companies.

As lenders' credit risk appetite and their factors for fixing rates can differ widely, ensure to compare all the possible home loan options before you make your final decision. Begin by discussing with your banks or those lenders with whom you share long term existing relationships as they may offer you preferential interest rates on home loans. After this approach, online lending marketplaces strike a comparison of rates being offered by various other banks and HFCs based on your income, credit score, loan amount, job profile and LTV ratio. Your final home loan application should be with the one charging the lowest home loan rates for optimal loan tenure and home loan amount. 

FAQs

✅Which bank home loan is best? 

Lenders offering home loans of below 7% p.a are Punjab National Bank, State Bank of India, Bank of Baroda, Union Bank of India, Punjab & Sind Bank, Central Bank of India, Bank of India, Canara Bank, UCO Bank, Bank of Maharashtra, IDBI Bank, Kotak Mahindra Bank, ICICI Bank, Axis Bank, LIC Housing, HDFC Ltd and Bajaj Finserv.

✅Which bank provides the lowest interest on a home loan? 

Kotak Mahindra Bank and Punjab & Sind Bank are providing the lowest interest rate that starts from 6.65% p.a. They are followed by lenders, like State Bank of India, Bank of Baroda, Union Bank of India, Punjab National Bank, Central Bank of India, Bank of India, Canara Bank, UCO Bank, Bank of Maharashtra, ICICI Bank, Axis Bank, LIC Housing, HDFC Ltd and Bajaj Finserv, all of them charging an interest rate of below 6.95% p.a.

✅How much is the lowest interest on a home loan? 

Currently, the lowest home loan interest rate is 6.65% p.a. is offered by Punjab & Sind Bank and Kotak Mahindra Bank. 

✅Is availing a home loan a good idea? 

Yes, taking a home loan is one of the best ways to meet one's goal of owning a house at an early age. As the cost of owning a home involves a big-ticket amount, it may not be possible for young earners or even those nearing their 40s to pay the whole home cost to purchase it. And accumulating huge funds for purchasing a home at the time of your retirement may not sound like an appealing idea. Thus, home loans are the best option one can depend on to buy a home during their working stage. Remember that the option of loan prepayment is always available in case of home loans, and there are no prepayment charges attached in case of floating rate home loans. Thus, one is always free to prepay their home loan whenever they get surplus funds to lower their interest cost burden. 

✅Can I get a 100% home loan? 

No, as RBI allows banks and HFCs to fund only up to 75 – 90% of the cost of the property as home loan amount, the applicants of home loan require bearing the remaining cost from their own pocket in the form of margin contribution or down payment.