Importance of Interest Rate and EMIs While Applying a Housing Loan

When it comes to a housing loan, interest rates and EMIs play a pivotal role. More often than not, homebuyers opt for a floating rate home loan. If there is a fall in the interest rate immediately after taking the housing loan, the borrower may have to wait for one year for a revision, as most banks offer home loans based on the 1-year MCLR rate. The tenure of home loans usually ranges around 20 years, which is quite a long period. Needless to say, even a small rise or fall in interest rates can have a considerable impact on the overall cost of the property.

It is interesting to note that even though the Reserve Bank of India (RBI) did not cut the repo rate, in its recent monetary policy review, home loan rates may still fall. Banks can now lend more to homebuyers, as the RBI reduced the amount that banks are supposed to set aside as security on house loans, from 0.4% to 0.25%. Besides, the statutory liquidity ratio has also been reduced by 50 basis points, which means that banks now have more capital to lend, which can lead to lower home loan rates.

As far as deciding the EMI payment is concerned, experts are of the opinion that borrowers should take into consideration one’s current cash flows and future cash flows. Banks are also flexible when it comes to keeping a lower EMI in the initial year. Make sure you take into account emergency situations, since huge EMIs could lead to financial crisis, as they eat up a major chunk of your earnings. One should opt for aggressive EMI payments, when the cost of borrowing increases, of if the borrower has adequate liquidity.

One of the most instrumental factors that can affect the housing loan EMIs is the interest rate fluctuations. This is mostly applicable to the floating interest, which fluctuate as per changes in the market. These fluctuations can have both negative as well as positive effects on your home loan EMI. The changes in the international market also bring about a change in the interest rate. Whenever there is an alternation in bank rates by the RBI, it finds some or the other reflection in the EMI of your loan. However, do not presume that floating housing loans are never a good idea. When there is a dip in the bank rates, it reduces the EMIs significantly. Fixed home loan interest rates also changes to floating rates but this happens after a course of time. Floating rates of interest for a housing loan are preferable for borrowers with a slightly more flexible income.

You can use online housing loan EMI calculator to estimate the amount of monthly payment that you will need to make to the lender. To improve your housing loan eligibility, ensure that your home loan EMI is not more than 40% of your monthly income and there is no other significant EMI that needs to be taken care of. Also, take into account all your regular expenses and the fact that they are likely to increase over time, when calculating your home loan EMI. This will ensure that your financial life is not adversely impacted by the housing loan. Also, it is crucial to remember that your home loan may undergo change over the course of loan tenure depending on various factors such as change in loan tenure, change in interest rate, prepayment of home loan principal amount, step-up or step-down repayment, shifting loan to different lender, and so on.

About This Author

Anamika Verma A financial Advisor Joined: December 18th, 2017