Home Loan Interest Rate 2021

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Types of Interest Rates for Home Loans

Interest rates on home loans are levied under two different types, fixed and floating. Take a detailed look at both types.

a. Fixed rate of interest

Fixed home loan interest rate remains constant for the entire loan tenor. It allows you to estimate your total repayment liability and interest outgo at the beginning of the loan tenor. Availing of a home loan at a fixed rate of interest also helps in planning repayment and manage finances efficiently.

A fixed lending rate on home loans is suitable during times when the possibility of an increase in interest rate exists. Depending on the current trend in rate changes, you can avail of finance at the lowest possible rate.

A fixed-rate of interest may not be suitable under circumstances that predict a decreasing trend in interest rates.

b. Floating rate of interest

Unlike fixed rates, floating home loan interest rates are variable and change over the loan tenor due to multiple contributing factors. Based on the benchmark rate linked to housing finance, the floating interest rate on home loans increases or reduces.

You can opt for a floating interest rate on home loans when the market changes indicate a trend of falling rates.

A floating rate of interest may not be suitable during high market volatility as the risk of rising rates exists and can result in increased interest accumulation over time.

Depending on your suitability, borrowers can opt to switch from fixed to floating interest rates and vice-versa during your loan tenor. However, fixed rates are usually 1-2.5% higher than floating interest rates.

Different Methods to Calculate Home Loan Interest Rate

There are three different methods that you can use to calculate your home loan interest rate. Here is a step-by-step guide for your reference.

Using the interest formula

This is a manual process that requires you to use the following formula.
EMI = [P x r x (1+r)^n]/[(1+r)^n-1]

Here, ‘P’ is the principal or loan amount, ‘r’ is the rate of interest on offer and ‘n’ is the tenor of the loan in months.

Using Microsoft Excel

A simpler option is to use the Microsoft Excel program and calculate EMIs using the ‘PMT’ function, which is
=PMT(RATE,NPER,PV,FV,TYPE)

Here, ‘RATE’ is the interest rate offered divided by 12, ‘NPER’ is the number of EMIs, and ‘PV’ is the principal amount. Both ‘FV’ and ‘TYPE’ should have the value set to 0.

Using a home loan EMI calculator

Using a Home Loan EMI Calculator is the simplest option and guarantees error-free results every time. These are the steps to follow.

• Step 1: Enter the loan amount in the field marked ‘Loan Amount’.
• Step 2: Input the interest rate under ‘Interest Rate’.
• Step 3: Choose a tenor under the ‘Tenor’ field.
• Step 4: Click ‘Calculate’ to get your results

Factors That Affect Home Loan Interest Rate and EMI

There are several factors that affect the interest rate on home loans. Check the factors that impact the housing loan interest rate and payable instalments before applying, for affordable repayment. Factors affecting the interest rate also impact the EMIs payable as a change in interest rate is directly proportional to a change in the instalment amount.

1. 1. Type of interest rate

   You can avail of a home loan at any of the three types of interest rates, fixed, floating or mixed. As fixed rates remain constant throughout the loan tenor, floating rates are affected by policy rate changes introduced by the RBI.
   
   A reduction in RBI’s key policy or repo rate and lender competition pulls down the housing loan interest rate and vice-versa. Home loan borrowers can opt for a floating rate during trends of falling market rates. Fixed rates, on the other hand, can be suitable when the lending rates are set to rise in the future.
   
   Mixed rates of interest result in interest levy at a fixed rate at the onset of a home loan tenor and convert to floating rates after a set period.

2. 2. Benchmark rate of lending

   Benchmark lending rates can either be Marginal Cost of Funds based Lending Rate (MCLR) or Repo-Linked Lending Rate (RLLR). Financial institutions decide a reset period for MCLR for durations of 3 months, 6 months, 1 year or 2 years across the home loan tenor and levy interest rates accordingly. RLLR is directly linked to the RBI’s repo rate and bears a quick adjustment with every change in the policy rates.
   
   The RBI has decided to phase out MCLR-based lending over time to introduce a more transparent and repo rate-receptive RLLR to offer affordability to customers and improve the overall banking system.

3. 3. LTV or Loan to Value ratio

   LTV is the maximum loan amount a lender extends to home loan applicants as a percentage of the property’s current market value. A high  LTV, while bringing suitable financing value, also translates to a higher loan quantum and increased risk of lending, resulting in an increased interest rate. Borrowers can increase their down payment amount to pull down the total loan quantum for an affordable housing loan interest rate.

4. 4. Property’s location and condition

   The location of a property, its current condition, and the amenities available determine its resale value. The age of the property also commands its resale prospects. A high resale value means a lucrative opportunity for financial institutions, incentivising them to offer lower interest rates to borrowers and vice-versa.

5. 5. Repayment tenor

   The repayment tenor of home loans is directly linked to the risk of lending for financial institutions and the time value for the money extended as advance. A borrower’s housing loan interest rate is thus set to be higher for an extended tenor and lower for a shorter period of repayment.
   
   The EMIs are inversely related to the repayment term, making instalments dearer for a short tenor, but interest accumulation remains in check. Contrarily, a long tenure means easy and affordable EMIs but higher interest accumulation.

6. 6. Applicant’s financial profile

   The financial profile of an applicant also indicates the margin of risk a financial institution undertakes when lending. Salaried borrowers with a suitable job profile at a reputed organisation or self-employed individuals with stable and regulated income and a high credit score attract competitive interest rates as the risk involved is limited. Such applicants can also negotiate for an affordable rate to make convenient repayment.
   
   Interest rates usually remain high for applicants with unstable income or job profiles due to a higher margin of risk involved.
   
   Make sure to consider all these factors before applying for a home loan to secure the best interest rate and EMI amount on your housing finance.

How to reduce the home loan interest burden?

As various factors contribute to home loan interest rate determination, interest accumulation on the loan amount is consequent to the rate availed. Adopt a few strategies to check the interest burden on your home loan for affordable repayment over the tenor. Take a look.

• A. Select a short tenor for repayment

  Home loans are long-term advances extending up to 30 years to make repayments affordable for borrowers. An extended tenor also means an interest rate levied for more years and a substantial interest burden.
  
  Opt for a shorter tenor to keep the interest accumulation in check as a lesser number of years ensures interest is levied for a limited period. Use a home loan EMI calculator to compare different tenor options and select a suitable repayment period that helps reduce the total interest.

• B. Opt for a balance transfer facility

  A home loan balance transfer facility allows you to switch your outstanding loan amount to a financial institution offering a reduced home loan interest rate. The refinancing facility from Bajaj Housing Finance Limited also comes with high-value top-up loans borrowers can utilise to fulfil diverse funding needs due to zero end-use restrictions.
  
  Along with affordable home loan interest rates and reduced interest burden, the balance transfer facility also offers EMI holidays for up to 3 months for convenient repayment and improved management of finances.

• C. Request annual EMI revisions

  Borrowers can also opt for annual EMI revisions with each increase in income or a salary hike as higher EMIs mean a quick reduction of the outstanding loan liability. Early repayment of the principal also cuts down the loan tenure and helps reduce the total interest accumulation. Home loan borrowers can ideally increase their EMIs payable by 5% with every 10% increment in income.

• D. Prepay with any lump sum available

  Prepayment is another useful facility to utilise for an overall reduction in home loan interest burden. Opt to part-prepay your home loan at any time before the tenor ends with an available lump sum amount. Part-prepaying helps reduce the outstanding loan principal and limits the overall interest accumulation.
  
  Borrowers can also choose to foreclose the loan account altogether with sufficient fund availability to cut down any new interest accumulation on the outstanding principal.
  
  Bajaj Housing Finance Limited extends both the prepayment facilities on floating rate home loans at nil charges to increase borrower affordability.
  
  Other ways to limit the interest outgo include making a higher down payment, negotiating with the lender, and documenting all sources of income to secure a competitive home loan interest rate.