It is the most important component of your home loan, and it determines the affordability of the loan product. This article presents a few facts about home loan interest rates.
Taking a home loan to buy your first home is a common phenomenon in today’s times. Rising realty prices have made it practically impossible to plan an outright purchase using only your savings. But taking a home loan, though a simple process, is fraught with some unknown facts that you need to be cognisant about.
This article attempts to clarify how the interest manipulation can affect your EMIs and overall loan affordability –
It can be changed at a later date
The rate of interest on a home loan is a pre-determined value, but it is not permanent. What this means, is that the interest rate can be changed at a later date as per changes in market rates. Normally, the interest rates drop when the RBI reduces the repo rate on lending to banks and financial institutions. Rates may also drop in a competitive market, if some banks and housing finance companies offer lower rates that draw in a lot of customers. But a rate revision on an existing home loan is possible only if you have home loan at a fixed rate of interest (known as borrowing on MCLR).
It differs across various home loan categories
Interest rates on home loans vary across different product categories. For instance, the home purchase loan will have a lower rate of interest than a loan against property. Similarly, the home loan interest rate in India for NRIs are higher – for instance, Punjab National Bank Housing Finance Limited (PNBHFL) offers home loan interest rates in India for NRIs from 8.5% to 10.75% for salaried persons and 8.75% to 11% for self-employed professionals. The fixed rates are different from these. The interest rates for construction loans, plot loans and home improvement loans may also differ.
There is a pre-EMI interest to pay
One type of interest that you may not be aware of, is the ‘pre-EMI’. The pre-EMI is a simple interest that is calculated from the date of disbursal to the actual date of the EMI cycle commencement. It is applicable under two conditions:
* When you buy an under-construction property. Buying an under construction home often means that you pay at least half of the flat’s value right now, and wait for the house possession to pay the rest. The intervening time period may be a few months to even two years. Meanwhile, the bank disburses the partial loan amount and charges you a pre-EMI till the date that you get possession. On possession, the actual EMI cycle begins. It is advisable to not take a home loan against an under construction property that is over a year away from completion – you will pay quite a substantial sum comprising simple interest before the actual EMIs are paid.
* When you buy a ready possession home. You can get the home loan disbursed in one full amount for a ready possession home. But there will still be a delay of a few days between the disbursal date and the date of the first EMI payment. In this case, the pre-EMI is calculated for the intervening days.
You can also opt for a pre-EMI model of payment for the times when you are short of funds. But this option is subject to the lending institution’s policies on EMIs.
It can be reduced via loan transfer
Housing finance companies and banks allow a home loan transfer in case you wish to shift your existing loan to another lending institution. The transfer is done to make use of the second lender’s lower rate of interest. Suppose your current lender offers a loan at 11.25% and you find another lender offering the same loan at 9%, you can transfer to the latter after undergoing the necessary processing formalities. But if the processing charges for the transfer outweigh the gain in interest reduction, then it is best to not effect the transfer at all.
The rate of interest may be higher for those with low credit scores
If you have been charged a higher rate of interest on your home loan, the answer could lie in your credit history. Do you have unpaid loans on your credit card, or a personal loan that you are servicing at a high rate of interest? It is better to repay these other loans before you apply for a home loan. When your debt history is clear, your credit history automatically clears up as well. Housing finance companies charge a higher rate of interest to customers who they consider a higher risk category – these are customers with many existing debts, and whose income is spread quite thin servicing the different types of loans.
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