Since February 2019, home loan interest rates have ricocheted almost unceasingly in the Indian housing finance market. Governed by numerous socio-economic factors and corrective measures by RBI, like repo rate cuts, financial institutions have been frequently prompted to revise their interest rates on home loans.
Nevertheless, much to the relief of borrowers, such rate revisions have been unfailingly in their favour throughout. As of May 2020, the interest rates for home loans in India are largely in the gamut of 8% – 12%. Such low rates come amid an unprecedented financial crisis compounded by the already existing economic crisis that India was facing since 2019.
However, borrowers must make one other consideration to determine whether current home loan interest rates are best for them in 2020 or at any other point in time.
Types of Interest Rates for Home Loans
One of the most important factors that govern interest accrual on a home loan is the type of interest rate chosen for by a borrower. Primarily, there are two types of interest rates discussed as following –
- Floating Interest Rate
In this type, the interest rate floats or varies depending on the prevailing market conditions and/or directives of RBI. A floating interest rate, therefore, continually fluctuates during the life of a home loan.
It primarily involves a base rate and a floating component. This base rate is governed by said market conditions. Therefore, any change in the base rate will result in a revised home loan interest rate.
One of the primary advantages of this type of interest rate is that it is typically lower than its fixed counterpart. Therefore, individuals opting for it stand to considerably save on the interest outgo, largely because of the long life of a home loan. Furthermore, any reduction in the base rate would also result in a substantial saving for borrowers opting for this type of interest rate.
However, since it is of varying nature, it hinders budgeting for borrowers. Moreover, any hike in said base rate can make a borrower’s monthly budget go sideways significantly.
- Fixed Interest Rate
As the name suggests, this type of interest rate remains fixed throughout the tenor of a home loan. Once set, it does not change with market conditions or any directive by RBI. Therefore, individuals pay a fixed sum as instalment throughout a loan tenor.
By virtue of being fixed right from the onset, individuals can utilise a loan EMI calculator to learn of their monthly EMI obligation when availing a home loan. Thence, a fixed interest rate is ideal for a budget with no risk of it going sideways during such tenor.
However, fixed home loan interest rates are typically higher than floating rates. Therefore, individuals opting for this type might have to shell out considerably more as interest. Furthermore, such borrowers cannot enjoy base rate reductions.
However, financial experts suggest going for it if economic conditions indicate a rise in interest rates in the future.
Individuals ought to consider their priorities as well as their financial standing and appetite for uncertainty in their budget when choosing between floating and fixed interest rates. That way, customers can ensure what is best for them.
However, benefit in interest outgo is not only achieved by low-interest rates that are set by financial institutions under the direction of RBI. Individuals can also take charge in the matter to ensure restricted interest accrual.
Which Factors Influence Housing Loan Interest Rates?
- Credit Score
The standard CIBIL score for a home loan is 750. Although, financial institutions might consider applicants with a lower credit score; however, in that case, the levied home loan interest rate can be high.
An applicant with a high income can fetch a competitive interest rate due to the low perceived risk of delinquency. Individuals can also mention any additional sources of income to strengthen their case and negotiate for lower rates.
- Debt-To-Income Ratio
Financial institutions look favourably upon customers who have a low debt-to-income ratio. It attributes to an individual’s feasibility to avail such a high-ticket loan.
Lastly, not as a measure to reduce interest accrual but to take advantage of the same, individuals can also avail home loan interest tax benefit under Section 24(b) of the IT Act. Thence, regardless of the current interest rates – which are considerably low at the point – individuals ought to consider the aforesaid points when availing a home loan to maximise their benefits from it.