New Delhi [India], January 13 (ANI/ATK): With rising costs, different financial institutions have increased the interest rate on home loans. This can turn out to be an additional burden on your finances and lead to disruption of your monthly budget. This can lead your family to compromise on their current lifestyle.
There are several factors affecting housing loan interest rates. You should be aware of them to devise a perfect strategy for reducing these rates effectively. Keep reading to know these factors in detail.
Factors Affecting Home Loan Interest Rates
Below are some factors that can have a prominent impact on housing loan interest rates:
- Type of interest rate: There are different types of interest rates that financial institutions offer. This includes fixed, floating and hybrid interest rates. For fixed type, the rates remain constant throughout. For the floating type, the rates fluctuate with changes in the credit market. Hybrid type is usually a mixture of fixed and floating rates.
- Loan-to-value ratio: It refers to the credit amount that you are eligible for against the value of the property that you are keeping as a mortgage. For instance, if the LTV is 90% and valuation of your property is Rs. 1 Lakh, you can get a loan of up to Rs. 90,000. However, you should note that for higher LTV, the interest rate also increases.
- Different RBI policies: RBI keeps on introducing various policies with regard to housing credit interest rates. For instance, it has introduced the Marginal Cost of Funds Based Lending Rate (MCLR) system. According to this, you can set a date for revision of home loan interest rates.
- Benchmark Rate of Lending: The benchmark rate for lending is either MCLR or Repo-Linked Lending Rate (RLLR). RLLR usually keeps fluctuating with a change in the repo rate. Furthermore, MCLR duration usually varies with financial institutions and is generally for 3 months, 6 months and so on.
- Repayment tenure: The repayment tenure usually has a prominent effect on HDFC home loan interest rate. For a longer duration, rates are usually lower. Conversely, for a shorter duration, rates are pretty high. Hence, you should decide a comfortable repayment tenure according to the availability of funds.
Once you know them, you can optimise some of these factors to effectively reduce interest rates of housing loans.
Ways to Reduce Home Loan Interest Rates
Below are some ways in which you can instantly reduce housing loan interest rates:
- Increase your income: You can look for additional sources of income. Once done, you can extend its proof to your lender. This makes them believe that you have enough finances to repay your EMIs on time and hence they can consider your request for negotiation.
- Maintain a good credit score: A good credit score reflects that you are an efficient financial planner with a good credit repayment history. This is beneficial as your lenders can trust you with timely payment of EMIs. Hence, you can use this to your advantage and request a negotiation of the interest rates.
- Opt for joint housing credit: A joint home loan usually makes the lender believe that they can approach the other person in case you delay or default on your credit repayment. Thus, it gives you an opportunity to request them to approve your credit request at lower interest rates.
- Go for lower credit amount: There are times when individuals opt for an increased amount to stay prepared for unplanned need for additional funds. However, the interest rates are directly proportional to the credit amount. So, for a lower interest rate, you should request an amount that is adequate to meet the present needs.
- Select floating-type interest rate: Since floating-type interest rates fluctuate with changes in the repo rate, it can be beneficial for you in the long run. This is so because when the repo rate is lower, the interest rate decreases. Hence, you will have to pay lower EMIs.
Once done, you can calculate the payable EMI with the appropriate plot loan interest rate to select the most appropriate principal and duration of credit repayment.
Different Ways to Calculate Home Loan Interest
Below are various ways of calculating the EMIs based on different values:
- Using Formula: You have the option of manually calculating the EMIs using the formula EMI = [P x R x (1+R)^N]/[(1+R)^N-1]. Here, P refers to loan amount, R refers to interest rate and N refers to repayment tenure. You can easily use the available values for getting required results.
- Using an online EMI Calculator: Manual calculations can be time-taking, complex and prone to errors. Hence it would be prudent to use online EMI calculators for instant, error-free results. Also, these online calculators are free-of-cost and easy-to-use and hence simplifying the process.
- Using Microsoft Excel: You can use the 'PMT function' on the excel sheet for EMI calculation. The formula for this is PMT (RATE, NPER, PV, FV, TYPE). Here, 'RATE' is the interest rate, 'NPER' refers to the number of EMIs and 'PV' refers to the total principal amount. Also, you should set the value of 'FV' and 'TYPE' to zero. All you will have to do is input the values accurately for correct results.
Now that you have a clear idea about the factors affecting the HDFC home loan interest rate, and the ways of reducing them, you can formulate your own strategy. This would help you to save sufficiently on your monthly instalments and interests.
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