Owning a house is a dream for many, and home loans are often the bridge that connects this dream a reality. But for the sake of knowing, one must understand how a home loan’s interest rate is computed. It is closely related to computing the total cost of borrowing and how much your monthly EMIs will be.
In India, the home loan interest rate relies on multiple economic and personal considerations. The following is a concise explanation of how banks decide on interest rates and how you can remain informed.
1. External Benchmarking: The Foundation of Interest Rates
Since October 2019, the Reserve Bank of India (RBI) mandated all banks to link their floating rate retail loans, including home loans, to an external benchmark. The most common external benchmark used is the RBI’s repo rate—the rate at which the RBI lends money to commercial banks.
So, the home loan interest rate is usually calculated as:
- Interest Rate = Repo Rate + Spread
Repo rate is changed from time to time by RBI keeping in view inflation, market sentiment, and general well-being of the economy. When the repo rate increases, the home loan rate increases; when it decreases, your rates can come down—making the process more transparent compared to before.
2. The Role of Spread and Margin
Although the repo rate is fixed by the RBI, each bank adds its spread to it. The spread depends upon internal factors such as:
- Cost of funds of the bank
- Operating expenses
- Credit risk premium based on the profile of the borrower
For example, two people applying for the same loan amount from the same bank will be offered varying interest rates if one of them earns a higher income or credit rating than the other. Most of the personalisation takes place here.
3. Fixed vs Floating Interest Rates
The banks usually offer two types of interest rates:
- Fixed Interest Rate: The interest rate remains fixed throughout the entire loan tenure, regardless of variations in repo rates.
- Floating Interest Rate: The interest rate fluctuates with the change in the external benchmark.
Most homebuyers opt for floating rates because these are lower during initial periods. Fixed rates do give certainty and stability, especially needed during periods of fluctuating interest rates.
4. What Affects Your Interest Rate
Apart from economic markers, individual parameters also influence the interest rate for your home loan. These are:
- Credit Score: A Higher score (680+) generally deserves a lower rate.
- Income & Employment Type: White-collar workers with regular jobs may get better conditions than working professionals who are self-employed.
- Loan Amount & Tenure: Long-term loans or bigger loans may carry different rates based on perceived risk.
- Loan-to-Value Ratio (LTV): A low LTV—i.e., a higher down payment—is likely to equate to improved interest terms.
Banks use these metrics to determine your risk profile and then adjust the spread.
5. Why Understanding EMI Matters
While knowing the rate of interest is important, borrowers must also be aware of how it gets translated into monthly installment amounts. That’s where using a home loan EMI calculator online helps.
You can do the following with this tool:
- Get on-the-spot EMI quotes by loan size, interest rate, and term
- Make more precise planning for your month-end expenses
- Compare different loan offers easily
- Understand the impact of prepayments and tenure extensions
Most lenders today offer a home loan EMI calculator online, which is easy to use and provides instant results, making it easier for borrowers to make informed decisions before applying for the loan.
Tools Offered by Grihum Housing Finance
To guide customers in making informed borrowing decisions, Grihum Housing Finance offers an entire home loan EMI calculator online. The calculator helps the borrower understand his/her monthly installment amount, explore different options for loans, and make right financial decisions in accordance with his/her particular needs.
Conclusion
Understanding how banks calculate the home loan interest rate in India is essential for every potential homeowner. From repo rate changes and bank spreads to personal credit scores and risk profiles, multiple factors come together to determine the final rate you’ll pay.
By being adequately educated and using tools like a home loan EMI calculator online, you can prepare yourself for your home loan process better. With products that aim to make the borrower more robust, Grihum Housing Finance walks with you on your path to home ownership with transparency, ease, and reliability.
