The interest rate of a home loan plays a direct role in the loan repayment journey. The loan repayment is in the form of monthly instalments. These instalments include both interest and principal components. Therefore, if the lender has offered a low interest rate, the monthly instalments of the loan would be lower too. This is why it is so important for borrowers to carefully calculate the home loan interest rate and its impact before handing in their loan applications.
Calculation of home loan interest rate in India
There are two different types of home loan interest rates in India: floating and fixed. When a borrower opts for a floating interest rate, the interest on their loan would vary from time to time. On the other hand, fixed interest rates mean that the interest of the loan remains constant throughout the repayment tenure.
3 factors affecting the change in home loan interest rates
1.Credit score
Any lender will always consider your credit score while reviewing your loan application. A good credit rating can also help a borrower in getting a lower home loan interest rate. On the contrary, if a borrower’s credit score is low, they might have to pay a higher interest rate for their housing loan.
2.RBI policy
Changes in the RBI policy could result in a change in the home loan interest rate as well. For instance, after the new MLCR system was introduced, borrowers can now set a date at which the interest rates of their loans will be revised. This date is usually set every 6 months or 1 year. This helps borrowers in benefitting from a change in the interest rates.
3.Money supply
If there is a shortfall of funds in the economy, lenders are likely to increase the interest rates while sanctioning loans. This is the same when there is a high demand for loans. However, if lenders have more money to lend or the demand for loans is at a low, the interest rates will be lower.
Formula to calculate home loan interest rates
When a borrower needs to calculate their housing loan interest rate manually, they need to apply this formula:
EMI = [P x R x (1+R)/\N]/[(1=R)/\N-1]
In the above-mentioned formula,
P – Principal amount
R – Rate of interest
N – Number of monthly instalments
Since this is a manual method of calculation, human errors are quite likely to take place. This is why it is always best to take the help of a home loan EMI calculator. This online tool is offered by most lenders on their websites and is free to use.
With this calculator, borrowers can easily find suitable repayment tenures as well as decide their budget for a house. It also helps them understand whether a home loan plan is affordable or not. This ultimately proves to be useful in avoiding major financial troubles in the future and helps in following a steady repayment plan.
