In simple terms, interest or interest rate refers to the amount that has to be paid by a borrower in exchange for using assets provided for a fixed duration by the lender. In the case of institutional loans, the asset is usually cash. The interest is charged as compensation for the time when the lender is unable to use the money. Interest is thus also called the cost of borrowing. Therefore, when applying for a loan, you have to pay the additional interest along with the loan amount at a predetermined home loan interest rate.
Calculating interest rate for a home loan
When you apply for a home loan, you have to know the home loan interests rate you have to pay. There are multiple benefits of calculating EMIs before taking a home loan.
You can calculate home loan interest and EMI in two ways:
You can calculate the interest payable on a home loan using the following formula:
I = P (1 + r/100) ^ n – P
Where ‘I’ is the interest, ‘P’ is the principal amount or loan’s amount, ‘r’ is the interest rate, and ‘n’ is the number of times the interest is compounded.
Online calculator method:
You can calculate the monthly interest amount you need to pay using an online calculator by following the steps mentioned below:
Step 1: Visit an online home loan interest calculator.
Step 2: Enter the total loan amount, annual interest rate, and total loan tenor.
Step 3: Get the monthly home loan EMI payable directly from the calculator.
Apart from the interest payable, most calculators also display other additional information. These may include total interest payable, home loan processing fee, final payable amount, etc.
Factors affecting home loan interest rate
Several factors can affect the interest rate applicable on your home loan. These factors include:
Your credit score or CIBIL score is perhaps the greatest factor affecting interest rates. It is a measure of a person’s creditworthiness. In general, a higher credit score leads to lower interest rates and vice versa. Most financing institutes consider the minimum CIBIL score for home loan eligibility to be 750 or higher.
This is also a measure of your creditworthiness when applying for a home loan. Well-paying and stable professions like those in the government sector are considered low-risk. Self-employed professionals like doctors and accountants are also included in this group. The home loan rates charged in these cases are lower.
Nature of property:
The property you intend to purchase can also impact interest rates on a home loan. A property situated in a prime location built by a reputed developer will be more valuable than those with poor connectivity and amenities. Therefore, such properties will have a high resale value and are likely to have lower home loan interest rates.
Interest rates on loans are fixed by financial institutions based on the RBI issued repo rate. A reduction in repo rates reduces the interest charged on loans, and vice versa.
The Loan to Value ratio refers to the amount of the property’s value available as a loan. In other words, if the down payment is low, the loan amount is higher. The housing loan interest rate in this case will also be high since credit risk is also perceived to be higher.
The total duration of a loan affects the interest rates. Loans with a longer tenor will have lower EMIs, but at higher interest rates. Shorter tenor loans will have lower interest rates even though the EMIs will be higher.
Global inflation has a significant impact on interest rates. This happens since inflation reduces the purchasing power of money. So effectively, the interest received on a loan will be reduced. Therefore, interest rates increase when inflation is considered. This is called the real interest rate, as opposed to nominal interest rate, where inflation is not considered.
Leading financial institutions extend several pre-approved offers to curb the delays of a home loan application process. These offers are applicable on financial products like home loans, LAPs, etc. You can check your pre-approved offers by submitting the required details.
When you apply for a home loan, it is essential to know the home loan interest rate payable beforehand. Compare the services and interest rates offered by various banks and NBFCs to select a convenient rate and tenor. You can then visit an online interest calculator to know the total interest and monthly EMIs you need to pay.