The home loan interest rate plays a crucial role in determining the EMI (Equated Monthly Installment) that a borrower has to pay towards their housing loan. An EMI is a monthly payment that includes both the principal amount and the interest of the loan. It is calculated based on the home loan interest rate, the loan amount, and the loan tenure.
The primary purpose of calculating the EMI is to ensure that a borrower can repay the loan amount comfortably without defaulting. The housing loan EMI calculator is a helpful tool for borrowers to understand their monthly repayment obligation accurately.
The home loan process involves several steps, including the application, documentation, verification, and approval. Once the loan is approved, the lender disburses the loan amount to the borrower, and the borrower starts paying the EMI.
How Does the Home Loan Interest Rate Affect EMI?
The housing loan interest rate is the most significant factor that affects the EMI. A change in the interest rate can cause a significant difference in the EMI amount. The higher the interest rate, the higher the EMI, and vice versa.
For instance, suppose a borrower takes a home loan of INR 50 lakhs for a tenure of 20 years at an interest rate of 8%. In that case, the monthly EMI comes to INR 44,986. However, if the interest rate increases to 9%, the EMI goes up to INR 47,714. That is an increase of INR 2,728 in the EMI amount, leading to a total increase of INR 65,472 over the loan tenure.
On the other hand, if the interest rate decreases to 7%, the monthly EMI comes down to INR 42,160, resulting in a total saving of INR 107,520 over the loan tenure.
Therefore, the home loan interest rate is a crucial factor that borrowers must consider while availing of a housing loan.
Factors Affecting Home Loan Interest Rate
The home loan interest rate is primarily influenced by external factors such as inflation, economic growth, and monetary policy. The Reserve Bank of India (RBI) regulates the monetary policy in India. It sets the repo rate, the rate at which it lends to other banks, to control the inflation and economic growth in the country.
When the economy is growing and inflation is high, the RBI increases the repo rate to reduce the money supply in the market. This leads to a hike in the interest rate offered by banks on home loans, making borrowing expensive.
On the other hand, when the economy is sluggish, the RBI intends to increase the money supply in the market. It reduces the repo rate to encourage borrowing, leading to a low-interest rate on home loans.
Another factor that determines the home loan interest rate is the borrower’s creditworthiness. A borrower’s credit score and credit history play a crucial role in determining the interest rate offered by banks on home loans.
A credit score is a three-digit number that indicates how likely a borrower is to pay their debts on time. The higher the credit score, the better the chances of getting a lower interest rate on the home loan.
Similarly, a good credit history that includes timely payment of past debts and no record of default can help negotiate a lower interest rate on the housing loan. The loan amount and loan tenure are also factors that affect the housing loan interest rate. Typically, banks offer lower interest rates on higher loan amounts and longer loan tenures.
The home loan interest rate is a crucial factor that affects the EMI. A borrower should choose a home loan with a lower interest rate as it can save them a significant amount over the loan tenure. It is essential to compare the interest rates offered by different lenders before deciding on a home loan.
Moreover, a borrower must maintain a good credit score and credit history to negotiate a lower interest rate on the housing loan. They must use the housing loan EMI calculator to understand their monthly repayment obligation correctly.
Overall, a borrower should consider the home loan interest rate, loan amount, loan tenure, and creditworthiness to make an informed decision while availing of a housing loan.