Everyone dreams of buying a home at some point in their life. But not all have sufficient money to fund their new home. In such cases, home loans come to the rescue. Home loans have helped many families feel the security of having their own space. However, the interest rate on these loans was still a concern for many.
Many financial institutions today offer home loans at affordable interest rates.
However, before you approach any financial institution, it’s important that you understand a few things about housing loan interest.
Types of Home Loans Interest Rates
Home loans are basically of two types – fixed rates loans and floating-rate loans. In a fixed-rate loan, the interest rates do not vary throughout the loan. On the other hand, a floating-rate loan is linked to an external benchmark and varies with the change in the benchmark rate.
Most financial institutions offer mixed home loan rates where interest rates are fixed only up to a certain tenure. Floating rates apply after that.
4 Things That Affect The Interest Rate On Your Home Loan
- Loan At RLLR
Most banks use RBI’s repo rate as the external benchmark to which they link their home loan interest rates. Such rates are called repo rate linked lending rates (RLLR) and have been available since October 1, 2019.
Some banks also refer to them as external benchmark lending rates (EBLR).
Whenever you approach banks and financial institutions for home loans, you need to ask about the RLLR. The lower the RLLR, the lower your EMI will be. Most lenders keep their markup 2 to 3% above the RBI’s repo rate.
However, banks may not lend at RLLR to every customer. There could also be a credit risk premium that banks may charge. The actual housing loan interest rate depends on various other factors besides the repo rate. The applicant’s gender, profession, credit score, income, loan-to-value ratio, and property location all play a role.
- Impact Of Repo Rate On RLLR
Your RLLR-based interest rate will vary each time there is a revision in the repo rate by RBI, as it is known to be a flexible rate. The rate will be immediately transmitted to you since RLLR have a quarterly reset date.
So whenever there is a decrease in repo rate, your housing loan interest will decrease immediately.
The immediate transfer of benefits is a great improvement from earlier MCLR-based lending. Earlier, it would take months for the policy changes benefits to pass to the borrowers. Now most lenders set a reset period of calendar quarters. So the applicable changes come into effect from the first day of the upcoming quarter.
The RLLR-based lending rate is favorable to borrowers in a declining interest rate environment. But when the repo rates rise, they will also be subjected to higher interest rates and higher EMIs.
- NBFCs Do Not Offer RLLR
While RBI governs banks, NBFCs are registered under the Companies Act. Hence they are free to set their lending rates as per their business requirement.
The interest rates of NBFCs depend upon the cost of their funds—the lower the cost, the lower the interest. Also, the effect of a revision in the repo rate may not be immediately transmitted to the borrowers.
While these may make the home loan a bit expensive in NBFCs, they also have certain other advantages over banks in other aspects of home loans. For instance, they have a more relaxed policy toward customers with lower credit scores. They also provide more options to customers who do not meet the eligibility criteria set by banks.
- MCLR To RLLR – Making The Switch
If your home loan is linked to the MCLR rate and you’re finding the interest rate high, you can switch to RLLR based system. The switch may help you save a few bucks, especially if you have considerable repayment tenure left.
You can switch from MCLR to RLLR either within the same bank or another bank. But remember, if the repo rate rises, your interest rate will rise much faster in RLLR-linked loans than in MCLR-linked ones.
Interest is a significant expense for borrowers, and you must understand the working of the RLLR and MCLR rates. If you’re planning to make the switch, do not forget to consider the cost involved in the same. First-time borrowers should also factor in the home loan processing fee, brokerage fees, stamp duty, and other hidden charges while purchasing a home.
Conclusion
Your credit score is also an important factor that affects the rate of interest that lenders offer. Make sure to keep it in the higher range so that you get the best possible interest rate.
Ask them to quote an interest rate based on the above parameters whenever you visit a bank or financial institution. You can then compare the rate with other lenders to find the most affordable loan.
