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 y 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.
