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Different home loan interest rates you should know

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The hope of turning your dream of owning a home is made true often with some help. Especially when it comes to finances. Home loans make sense too considering the time value of money.

As India opened up to liberalization, lending norms got looser, access to finance became better, and retail financing came to the fore. Gone are the days, where a generation ago, only the people with the highest social and monetary standing could build a home. Or maybe it was what one bought with their retirement benefits at the end of their active life. Which explains the Indian sentiment of a home purchase equivalent to the idea of settling down. It truly was a big deal just a decade ago. Just a look at the testimonials on Prisha Property Reviews will give you a fair idea of the healthy mix of age, and all demographics – an indicator that home finance is more accessible today.

With financial inclusions, and banking reforms, home loans, personal loans, educational loans have become easily available and accessible to the common man. But with every loan, comes the most vital factor of a loan – the interest rate.

What is an interest rate?

When a certain amount is being lent to the customer, the customer promises to payback the lent amount in installments over a period of time with an extra premium to compensate for the time. This is what we know as ‘interest’

When you borrow a sum of 1000/- and pay it to the person who lent it in 10 installments of 100 you are being charged an interest of 0% which is what we would ideally love for our home loans as well.

But then, since things are real, you get charged an annual interest rate. There are a few types of interest rates, which depend on the lender, the borrower and the terms and conditions at which the loan is being lent.

Fixed and floating rates:

While most banks and financial institutions offer a floating rate of interest for home loans now, the concept of fixed interest rate is worth knowing.

Like the name suggests, a fixed rate of interest is fixed throughout the tenure of the loan. So if you are availing a home loan of ten lakhs for a period of 10 years at a fixed interest rate of 10%, you would be paying the same interest rate from year 1 to year 10.

On the other hand, a floating rate of interest keeps fluctuating. This is usually ‘pegged’ for a period of one year or one month depending on the lenders policy.

How do banks arrive at interest rates?

The Reserve Bank of India, which regulates all Banks and Financial Institutions in India sets the basic interest rates for lenders in India.

Before 2016 it was the base rate that the RBI announced periodically. The lender could not lend below the base rate.

Since 2016, the RBI has implemented the MCLR or the Marginal Cost Lending rate. MCLR is the minimum cost of funds that the RBI arrives at keeping in view the economic conditions of the country. Think of this as a reference rate below which no bank is allowed to lend. So do all banks lend all loans at MCLR? The answer is no. The MCLR is a standard component of all interest rates to which the risk premium depending on factors like the customer’s repayment capacity, security credibility, and a spread depending on the type of loan – personal loans would be higher than home loans etc, is added.

Teaser rates:

While teaser rates are not a concept and more of a marketing technique, the idea behind teaser rates is offering the loan to the customer at a low interest rate for the first few years and subsequently shift it to a higher interest rate.

You must have come across these when banks announced that interest rate for women borrowers would be eligible for a lower interest rate and so on.

The underlying issue with teaser rates:

As a borrower it might sound super lucrative, but we must remember that there is no thing called a free lunch, says a senior executive from Golden gate properties. There are always implications, there is always the fine print. The low rate of interest might look initially attractive but borrowers are often faced with bigger EMIs when the tease period ends. So step into it with caution.

Always take note that you must fall within the 60-40 rule which means all your expenses including loan instalments should not exceed 60 or 65% of your monthly income.

This is a rough rule, and as your income goes up you can stretch it to 70 or even 75%.

Understanding the basics of rate of interests will help you make an informed decision. If your builder developer has a loan facilitation team like we at Prisha Properties do, chances are they would explain and help you take a rational decision.

Prisha properties is a step towards a conscious sustainable home for you. An IGBC certified company, we aim to develop green homes that are carbon negative, eco-friendly and adopt the best in class reuse-recycle methods.

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