Role of Interest Rates to Taking a Housing Loan

When applying for a Home Loan, the main factor that you look at is the Home Loan interest rates. This determines the total cost of the loan in terms of the interest amount payable. It can affect your EMI directly.

How Interest Rate Can Affect Your Home Loan

You have built good savings and investments, your income is more than enough to cover all your expenses. You can easily spare funds for EMIs on Home Loans. If you want to fulfil your dream of owning a home, you need to shortlist certain properties.

Now, you are looking at Home Loan options.

Searching for a Housing Loan

This is the procedure that you need to follow, when you are looking for Home Loans:

• Calculate your Home Loan eligibility.
• • Add up your net income.
  • Subtract regular expenses that you incur each month. These include other EMIs.
  • Subtract your contingencies.
  • The remaining amount is your spare funds.
  • Does it come to 45% or above of your income? If so, you can get the loan.

Before, getting a loan ask yourself the following questions.

• Do you have good credit score of 750 and above (CIBIL)?
• Do you have good funds put aside in savings and investments?
• Calculate the EMI for the loan amount you want. Will this be easy for you to pay each month without feeling a pinch?

Look for offers with lowest Home Loan interest rates. Keep all the documents required for Home Loan ready & apply for Home Loan.

Housing Loan Interest

Housing Loan interests vary across lenders. How they calculate the interest rate also varies. Banks have to use the MCLR system to set lending rates. NBFCs do not have to follow MCLR. Make sure to do a thorough comparison before making a final choice.

How Interest Rates can Affect you Home Loan EMI

• Any slight increase in interest rate can increase your EMI.
• Lenders, when processing loans, want your EMI to fall within 45 to 50% of your income.
• If the EMI is increased because of the interest rate and if it goes beyond the limit, they can lower your Home Loan amount.
• If the Interest Rate rises when you are in the middle of repayment, the EMI can go beyond your monthly budget.
• If you increase the tenure to bring down EMI, you will face an increase in Interest Rate.

How to Lower Interest Rate

The MCLR system ensures that banks have to include the rate at which they borrow money from the RBI.  They have to pass on the increase or decrease in these repo rates to their own customers.

HFCs and NBFCs follow Base Rate system, and they often offer Loans at lower rates than banks to stay competitive.

• Choose floating rate loans in most cases.
• They will be beneficial to you in the long run, even if the short term scenario indicates rising Interest Rates.
• The Interest will come down at some point in your tenure.
• Floating rate loans come with a penalty-free foreclosure option.
• You can also make partial prepayments on the loan without incurring charges.
• Doing so helps you to close the loan quickly, and helps you to save on the Interest amount you pay to the lender.

If market interest rates have decreased, and if your lender is offering lower interest rates to new customers, but not to existing customers, you can ask them to renegotiate your loan terms. If the lender is still unwilling to lower interest rate on your loan, consider a Home Loan balance transfer.

This is the process of transferring the loan to a new lender who is willing to take on the loan at lower interest rates. Calculate the charges involved and refinance the loan, only if it provides  substantial savings in interest payments.

Interest Subsidies on Home Loans under PMAY

In order to realize the aim of Housing for All by 2022, the Central Government has come up with a lot of schemes. Apart from affordable housing projects, subsidies on interest rates have also been announced. For the Urban Sector, there are three income slabs that can benefit from these subsidies:

• For those whose family income falls within Rs. 6 Lakhs per annum, a 6.5 percent subsidy is available on loan amounts up to Rs. 6 Lakhs.
• For family whose net income falls within Rs. 12 Lakhs, a subsidy of 4 percent is available on loan amounts up to Rs. 9 Lakhs.
• If the net income of the family does not exceed Rs. 18 Lakhs per year, there is a 3 percent subsidy on loan amounts up to Rs. 12 Lakhs.

How This Works

The subsidies do not limit the loan amount that you can apply for. It will just cover the max cap amount for each slab. On the remaining loan amount, normal interest rates apply.

To Illustrate:

Let us assume that you are in the second slab of Rs. 12 Lakhs income per annum, and you get a Home Loan of Rs. 35 Lakhs to purchase a home, with an interest rate of 9%.

On Rs. 9 Lakhs, you will be paying a 5% interest rate. On the remaining loan amount of Rs. 26 Lakhs, you will pay 9% interest.

To qualify for these subsides:

• You should not own any other residential property in any place across the country.
• Besides your income slab, there might be other concerning factors like the size of the house you are buying.

Use an EMI calculator to find good loan offers and see if you can afford the required loan amount. Look for ways to cut down interest rates like—choosing floating rate loans, increasing the EMI to shorten loan tenure and lower the interest rate, and foreclosing the loan.

You can also check if you’re eligible for interest subsidies on Home Loans. Doing so can drastically bring down the interest component of the loan.

Tags: home loan, Housing Loan

Category: Family Finances