When you take a home loan, its interest rate determines the amount that you will need to repay. So, by understanding how home loan percentage is calculated, you will be able to make better financial decisions for yourself and save a considerable amount of money in the long run.
How Home Loan Percentages are Calculated?
Banks and other financial institutions determine home loans based on:
1. Repo Rate and Lenders’ Spread
The Reserve Bank of India (RBI) establishes the repo rate, which influences the interest rates that banks and other financial institutions charge borrowers. After the RBI establishes the repo rate, banks add a margin over the repo rate to cover their costs and profit. The result is the final interest rate that you pay as your home loan interest rate.
2. Loan Amount and Tenure
Higher loan amounts or longer repayment periods often lead to slightly higher interest rates. This is because lenders take on more risk when the repayment duration is extended.
3. Type of Interest Rate
There are two main types:
- Fixed Rate: The interest rate remains the same throughout your loan tenure.
- Floating Rate: This rate is subject to change based on market fluctuations, which is typically tied to the RBI’s repo rate.
Fixed rates are better if you want stable monthly instalments. Meanwhile, floating rates may provide a cost advantage when market rates drop.
4. Property’s Value and Location
The market value of the property and its location also affect loan rates. Properties in prime/developing locations with higher resale value may attract favourable loan rates from lenders.
5. Credit Score and Income
Your credit score reflects your repayment history and financial discipline. A score above 750 can help you secure better home loan percentages. Likewise, a stable income assures lenders of your repayment capacity, which can reduce your rate.
Also Read: Mistakes to Avoid When Applying for a Home Loan
Ways to Get the Best Home Loan Deal
Before you submit your home loan application, there are some smart things that you can do to secure the lowest home loan percentage:
1. Compare Various Offers Before Applying
Generally, you should not go for the first offer you receive. Compare what different financial institutions are offering using online tools. You should compare each lender’s interest rate, processing fees and benefits. Even a one percent difference in rates will lead to significant savings over the term of the loan.
2. Choose a Shorter Loan Term
Selecting a shorter loan term will probably result in a higher monthly EMI than a longer term. However, this means you will be able to repay your loan in less time, which will lead to significant savings on the total interest paid.
The better you understand how your home loan percentage is calculated, the better you will get at making smarter financial decisions. Apart from these, you also need to choose financial institutions that offer competitive terms and interest rates, like PNB Housing Finance. This coupled with a transparent application process and flexible repayment tenures, allows you to turn your dream home into a reality.
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