Thinking of buying your dream home? But overwhelmed with information? We will help you get the right information. To decide which home loan would be the best one for you, first, you need to know all about the RBI’s new guidelines on home / mortgage loan sanctions. The Reserve Bank of India has asked all banks (local banks, finance banks, and commercial banks) to link their home loan interest rates to the external benchmark. So, it will be a wise decision to first check all the rules.
Apart from the government’s rules, there are some key points you need to consider too. Let’s throw light on the factors you need to consider before applying for a home loan in India.
Home loan Interest Rate
When it comes to applying for a home loan, the biggest factor is the interest rate. A lot of things depend on the rate of interest. So, it’s always better to do thorough research and then choose the best rate of interest in the market. To help you decide on the best deal, let’s discuss the types of home loan interest rates that are available in the market. There are two types – fixed-rate and floating-rate.
Fixed Interest Rate
Fixed interest rate is the type that is not affected by market fluctuations and other trends. The rate of interest remains the same till the end of the tenure. People prefer fixed-rate because it helps them plan their finances better and keep their budget fixed.
Floating Interest Rate
When you choose the floating interest rate, your EMIs are not fixed. The rate of interest is decided based on market situations. The interest rate is quite volatile and the base rate keeps on changing. A floating interest rate comes with its set of benefits. Firstly, the rate of interest is lower than the fixed rate. Secondly, when the market goes down, you can reap the benefits and reduce your EMI amount. With the Indian economy coming back to normal after COVID-19, the Reserve Bank of India has reduced the repo rate to as low as 4%, which is a very good news for homebuyers.
Floating rate vs Fixed rate
There are pros and cons to both, fixed-rate and floating-rate. Here is a chart to help you understand them better.
| Fixed rate of interest | Floating rate of interest |
| High rate of interest | Comparatively low rate of interest |
| Remains the same till the time of tenure | Changes with the market conditions |
| Fixed EMIs | EMIs keep changing depending upon the MCLR or market rate |
| Financial planning becomes easy | Can’t fix a budget |
| No risk | More risk |
| No chances of enjoying the market conditions | Can reap the benefits of market conditions |
| Good for short/medium term loans | Good for long term loans |
EMI
EMI or the Equated Monthly Installment is the amount you pay to your lender. It includes the principal amount as well as the interest on the outstanding amount. EMI is directly connected with the tenure of a home loan. Your EMI amount will reduce if your tenure is more. It is very important to plan your EMIs and set a budget before applying for a home loan. Are you confused about how to calculate your EMIs? No need to stress. There is a simple tool for emi calculation for home loan available online that you can use to find out your EMI amount. The EMI calculator also gives homebuyers a clear understanding of the EMIs and hence works as a financial planning tool too.
How is home loan EMI calculated?
You need to follow some simple steps to find out the right EMI amount.
Loan Amount: Put the loan amount you need
Loan Tenure: Put the desired tenure of the loan.
Interest Rate (% P.A.): Put the interest rate
Once you have entered the correct values, the online tool will give you the amount that you need to pay as an EMI. You can use this tool to compare rates of interest from different lenders and also budget your finances better.
Other factors that will help you choose the home loan are:
MCLR Rate:
MCLR is the minimum interest rate that the bank has to charge against your home loan. MCLR rate affects your interest rate; when the MCLR rate is more, your rate of interest will be more too. When applying for a loan, it’s very important to keep a check on MCLR rate.
Loan-to-Value (LTV) Ratio:
It is the percentage of the total amount of the property that you need as a loan.
CIBIL Score:
Your CIBIL score tells you your repayment history, finances, and how trustable you are. If you have a lower CIBIL score, chances are you won’t get a loan or will get it at a much higher rate of interest. On the other hand, if you have a higher credit score, you will be able to enjoy a lower rate of interest.
Location of the property:
Your property’s location plays an important part in your interest rates. Properties that have higher resale value and are located in developed locations, can get you a lower rate of interest.
Income stability:
Those with stable monthly income can avail home loans at lower rates. Meanwhile, people who have unstable incomes have to pay more rate of interest.
Tenure:
Now tenure is something on which a lot of things depend. If your tenure is short, your EMIs will be of higher value and vice-versa. But longer tenure would also mean you have to pay more interest.
Co-borrowing:
You can co-borrow the home loan with your spouse to avail lower rate of interest.
Down payment:
If you can afford to pay more down payment, you will be able to enjoy a lower rate of interest.
To conclude
Borrowers should consider all the above points and then choose what’s best for them. You can also talk to your friends or relatives to know more about the process. The home loan process can be quite long and frustrating. But if you do your homework properly, there won’t be any issues.
