To decide the best bank for a home loan it is important to know the offering by different banks, this includes the interest rate charged from the borrowers, processing fees, and taxes. Though the processing fee and taxes mostly remain the same, the thing which makes the difference is the interest rate.
Another big factor that decides your home loan interest rate is the Repo rate. As per the decision taken by the Reserve Bank of India (RBI), the Interest rates on home loans offered by banks are now linked to an external benchmark. This is for all commercial banks except the regional rural banks to link the interest rates on all retail loans including the home loans to an external benchmark rate which is in effect from October 1, 2019.
After the RBI’s decision, most of the banks have opted for the RBI’s repo rate as the external benchmark. And hence, RBI’s repo rate remains the one to which all floating rate loans are linked. The interest rate linked to the repo rate is RLLR (repo rate linked lending rate). This RLLR directly depends on the repo rate and the bank’s margin. However, banks are still authorized to charge the margin and risk premiums over and above the external benchmark rate. The margin or spread charged by the banks remains the same for all but the risk premium varies from borrower to borrower depending on the risk factor involved and their eligibility criteria fulfilment.
*It is important to note here- the repo rate is subject to revision by the RBI in every two months.
How does RLLR home loan work?
- You might be confused with all the above statements, so let’s make it simple for you to understand- To lend you money banks need to borrow from RBI, So, when the banks borrow funds from the RBI, it is at the repo rate.
- When RBI reduces the repo rate, banks lend you at a lower rate.
- For lending based on RLLR, such as the home loan interest rate will increase or decrease based on the repo rate.
Types of Home Loan Interest Rate offered by Banks
Fixed-rate of interest: For a fixed rate of interest, the interest charged on your home loan remains constant throughout the loan tenure, making the home loan EMI remain unchanged throughout the repayment schedule.
The advantage of going with the fixed rate of interest for your home loan is- You can plan your finances accordingly as a fixed amount is going to be deducted every month for your home loan EMI. However, the disadvantage of going with it is- when the market rates are low, then also you are bound to pay a higher interest rate.
Floating rate of interest: As per the floating rate of interest, the home loan rate is not fixed and can vary with the ongoing market fluctuations. The interest rate for the floating rate is linked to the external benchmarks. Hence, the floating interest rate varies as per these conditions.
As the interest rate is not fixed, your home loan EMI may increase or decrease based on the above-mentioned factors. However, opting for a floating rate of interest is beneficial in times when the market is down. However, in case the rate goes up you are bound to pay higher EMI for your home loan.
Home Loan EMI calculator
Calculating your home loan EMI can be a tough exercise for first-time home buyers. But, using a home loan EMI calculator can help you do these complex calculations in no time. Additionally, even before you take the loan, you will have a clear idea of how much your loan is going to cost you. This will help you to be financially and mentally prepared to pay a particular amount towards your home loan EMI.
- Performing complex calculations manually can be frustrating, using an online home loan EMI calculator can save your time.
- It gives you an accurate estimate, which will help you to plan your finances in a better way.
- The online EMI calculator is free for unlimited use.
So, before you apply for a home loan, check for the repo rate and interest rate offered by different banks. To Calculate your home loan EMI with Home Loan EMI Calculator to make it easier for you.