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New Delhi: There’s an interest rate attached to the principal amount of every loan. Home loans are no different. The different interest rates charged by banks and non-banking financial corporations (NBFC) determine the cost of your home loan. The interest rate determines your home loan EMI, which is the money you have to pay to y0ur lender against your loan every month. Interest rates are usually linked to repo rates and can vary from lender to lender.
Home loans are generally long-term loans because of the high principal amount. Before taking a home loan, you should figure out your overall interest liability towards the loan. You can calculate the same using the following method:
Calculate EMI
Following details should be given:
EMI = [P x r x (1+r)^n]/[(1+r)^n-1]
Wherein, P is the Principal, r is the rate of interest, and n is number of instalments or loan tenure in months.
How to Calculate the Effective Interest Rate?
Interest rate on home loan consists of two components, the base rate and the markup rate. The combined rate of the two is what you will be paying on the loan.
Base rate is the standard lending rate of a bank that is applicable to all retail loans. Base rate is subject to frequent changes on the basis of multiple inputs.
Markup rate is a small percentage that is added to the base rate to arrive at the EIR (Effective interest rate) for a specific type of home loan and varies from one type to another.
Effective Interest Rate (EIR) = Base Rate + Markup Rate
The Reserve Bank of India (RBI) had from April 2016 onwards, mandated a new method for computing lending rate to replace the base rate system.
The Marginal Cost of Funds based Lending rates (MCLR) is aimed at bringing more accountability and flexibility to the way rates are published by banks and financial institutions in India. The central bank has mandated lenders to fix the interest rate after studying the risk factor associated with lending to borrowers.
Various factors such as repo rate, deposits et cetera are being taken into account. This MCLR-based computation works out to be slightly lower than the erstwhile base rate.
Banks charge two different types of home loan interest rates — Fixed Interest Rates, Floating Interest Rates
Fixed Interest Rate:
If you opt for a fixed interest rate while taking a home loan, the rate remains even throughout the loan tenor. Depending on the type of loan offered by the bank, you may or may not be allowed to switch over to the floating rate system after completing a certain duration into the loan tenure.
Floating Interest Rate:
In case of a floating interest rate, the lender either increases or decreases the interest rates depending upon various factors such as RBIs monetary policy and lending rate revisions, the bank’s response to the revision et cetera.
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