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Interest rates and how they impact home loans


Interest rates and how they impact home loans

Homes represent major investments and most of us take out home loans to fund these purchases. Prior to applying, you should always check your own home loan eligibility. Take into account factors like existing loans that have been repaid, your own income, your salary and professional details, the income of our co-applicant or spouse and the credit score. In case the credit score is poor, you may still be able to get your home loan sanctioned albeit at a higher rate of interest.

You should factor in the 15-20% down payment for the home. The rest can be taken as a home loan. Interest rates on home loans are impacted by several aspects like global economic circumstances, money supply and inflation. The RBI makes use of several tools such as the Cash Reserve Ratio, Repo Rate and Statutory Liquidity Ratio for the regulation of interest rates.

The Repo Rate is that at which banks borrow from the Reserve Bank of India. This paves the foundation for all other rates of interest. The RBI ushered in the MCLR (Marginal Cost of Funds Based Lending Rate) system back in April 2016. This also ensures more benefits for borrowers in case of any reduction in interest rates. A spread is added to this MCLR by banks which makes up the final rate of lending. Home loans that are tied to the MCLR are reset every 6 months or so.

If you have loans which are tied to the previous base rate, they can be switched to the MCLR system by paying a few charges. Floating or fixed rates of interest were previously important based on the interest rate cycles in the Indian economy. Fixed rates remained unchanged for the loan tenor while floating rates changed with base rate changes. What is important now is the reset period. The rates will only be reset after a particular period of time. Interest rates vary under MCLR based on the amount that you applied for, the risk grade classified by the financial institution, loan tenor and other factors. Partial pre-payments on the home loan amount are always recommended since they help in lowering overall interest costs.

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