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Home Loan Interest Rates

The interest rate in general on home loans is also dependent on interest rate cycle as well.  Home Loan interest rates in particular are dependent on the home loan amount, loan tenure and the profile of the borrower. The borrower's credit history and score under credit information bureau like CIBIL also has an impact on the home loan interest rate. The home loan interest rates can vary from lender to lender. Lenders like SBI offer different home loan interest rate for its new customers against its existing customers.
 
Housing Loan interest rates can primarily be classified into two categories i.e. fixed rate and floating rate of interest. There are very few lenders in India who offer pure fixed home loan rates where the rate of interest remains constant for the entire tenure of the home loan, while most lenders have a reset clause of 3-5 years. In floating home type, the rate of interest on such loans  is subject to change whenever there are changes in the repo rates announced by RBI or any change is there in base rate of the bank.  Borrower should opt for fixed rate of interest only if he is certain that the rate of interest is the lowest in the interest cycle.  HDFC home loan interest rate is fixed for the entire tenure of loan, whereas SBI home loan interest rate is floating. 
 
Some lenders even offer hybrid home loan interest rates. In recent times, some lenders have come up with innovative home loan products like teaser / dual rate of interest where the interest rate on such loans remains fixed for initial 1-5 years and thereafter it automatically moves to a normal floating rate of interest. 
 
In case when the borrower prepays the housing loan taken under floating rate of interest, the lender cannot levy any penalty for prepayment of such loan as per the guidelines issued by RBI and National Housing Bank (NHB).
 
The borrower can exercise an option of converting from fixed interest rate to floating interest rate and vice versa by without paying any fee or penalty.  
 
Normally, the home loan interest rate for banks is expressed as certain point above Base Rate and certain point above or below PLR (Prime Lending Rate) popularly known as spread. 
 
The banks follow base rate system for calculating their interest rate, whereas the housing finance companies like HDFC Limited, LIC housing finance, etc. follow PLR system
 
The bank cannot lend below its base rate to any borrower. Any reduction in Base Rates automatically benefits all existing borrowers of the bank in their home loan interest rate. No such compulsions exist for the HFC's and hence banks that follow the Base rate systems are likely to be forced to pass on the benefits of drop in rates to its existing customers whereas no such system exists for Housing Finance Companies.
 
Hence, when there is a downward revision in the interest rates, the benefit, which has a certain degree of ambiguity in the PLR system, happens with a greater degree of transparency in the Base Rate system.

Guide to Home Loan Interest Rates

There are 2 kinds of lenders. Banks (State Bank of India (SBI), ICICI Bank, Axis Bank, etc.) and housing finance Companies or HFCs (HDFC, LIC housing finance, ICICI Home Finance Ltd. , Dewan housing finance, GRUH, etc)

Between them there are many kinds of Home Loan interest rates.

Fixed Home Loan interest rates : In true Fixed Rate Home Loans the rates remain fixed throughout the tenure of the loan no matter what. These kind of rates are very expensive (13.50%+ for a 20 year home loan in November 2010) and are offered by a limited number of lenders in the market.

Resettable Fixed interest Rates : Most of the so called Fixed Rates available in the market are of this variety. Here the interest rate is fixed for a period of 2-5 years and is then reset for a further period of 2-5 years and so on. These rates are more reasonable than the true fixed rates dealt with above. You just need to be clear about the nature of fixed rate contract you are getting into.

Floating Home Loan interest rates (also called variable rate loans or adjustable rate loans)

For Banks : The effective rate is linked to the Bank's Base Rate. The base rate would have to be declared by the banks at least once every quarter. It is open to each bank to decide its own methodology for fixing the base rate but it is not allowed to change the methodology after selecting one methodlogy. The banks will have to document how it has arrived at the base rate and follow the same system consistently. The calculation of the base rate will be open to the RBI for review (which should at least ensure that a set system is actually followed while calculating the Base Rate). This is of course a much better stipulation than  the earlier system of BPLR, where no such system was required to be documented by the bank and there was no question of any calculation that could be reviewed by RBI.

So even though composition of the base rate from the customer's perspective might continue to remain opaque still it is a better situation than the erstwhile BPLR since the regulator will ensure calculation of Base rate is done in a consistent and fair manner.

RBI has banned lending below Base rates except limited categories of loans such as employee loans, loan against its own fixed deposits, Differential Interest rate loans to SC/ST, etc..  

The advantage therefore from the consumer's perspective  is that when markets rate soften, obviously new borrowers will not borrow at the same rate as earlier. So if the base rate is fixed at 8%, and bank lends to corporates at Base Rate (8%) and possibly even to existing home loans seekers at Base Rates (8%). When interest rates in the market soften, the banks will be forced to reduce their Base rates as now new customers will not borrow at 8% and banks cannot lend below that rate without reducing their Base Rates. Thus banks will be forced to lower its base rate in response to market forces.

Any reduction in base rates, will automatically apply to the old customer as well as new customers in their home loan interest rate without any discrimination.  


For HFCs :

The Base Rate Guidelines are for banks, but unless the regulator for the housing finance companies, National Housing Bank comes up with similar guidelines, ironically two of the market leaders, HDFC and LICHF and many others will not be covered by the new regime. Their customer may still be governed under old non transparent regime.



Home Loan Interest Rates

Interest rate on home loan is something that one has to pay in lieu of the loan provided by the bank/financial institution. Home loan Interest rate is very important element when it comes to choosing a home loan for a customer & it also helps the customer on taking right decision or on pinning down that through which bank or financial institution he or she can go for. Depending on this interest rate, the loan amount and the tenure of the loan, your EMI is calculated which is how you repay your loan to the bank. In case the interest rate is higher, the EMI would be higher and in case the interest rate is lower, the EMI would be lower. Thus while choosing a bank with a lower interest rate, you can certainly increase your monthly savings. But please keep in mind that interest rate is not the only criteria to choose a loan. There are various other parameters as well. The EMI is calculated on a monthly reducing balance method.

Your home loan eligibility or how much loan you are eligible for is also calculated on the basis of the interest rates. In case you opt for a bank with a lower interest rate, then your eligibility will be higher compared to a bank that is offering a higher interest rate.

Types of Home Loan Interest Rate:-

1)  Fixed Interest Rate : A rate which is set In-advance or which is predetermined for entire term of  Home Loan.
                   
Let's take an Example :
 
Mr. X has a taken home loan from ABC Bank of Rs. 25 lakhs for 20ys. at an interest rate of 11.50% pa.

Then his EMI will be Rs. 26661 which he needs to pay for entire term of loan that is 20 years

Please note that most of the fixed home loan interest rates products available in the market are not fully fixed. Most of them come with a reset clause of 3 to 5 years. This means that the interest rates can be reset after a period of every 3 to 5 years (as mentioned in the loan document). 
.       
2)   Floating Interest Rate : A rate which is linked to a benchmark rate or the base rate of the bank or the financial institution. The floating home loan interest rate will change as and when the bank will change its benchmark rate or the base rate.

Let's take an Example :
                 
Mr. Y takes a floating rate home loan from ABC Bank of Rs. 25 lakhs for 20yrs.
   
For the initial year the interest rate may be around 9.5% that may change to 10% for the first 4 months of the 2nd year and after that it may change to again. It is not that the rates are always increasing, there are many times, when the clients benefit when the interest rates go down. When the interest rates changes, the customer is given an option to either increase or decrease the tenure or the EMI. In case, the customer chooses to change the EMI, he will spend more when the interest rate increase and will save more when the interest rate decreases. 

So, here we saw the simple understanding of what is Fixed Rate & Floating/Variable home loan interest rate. Generally, the interest rates for floating rates for home loans are cheaper than interest rate for fixed rates for home loan.

hence, there are several factors that need to be looked at if one ever has to compare home loan interest rates.


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