Borrowing money to buy a house is often a complicated process. In this article, we try to simplify it for you.
Fixed or Floating Rates?
Home loan rates are, in most cases, floating rates. They fluctuate with the overall interest rates in the economy. Specifically, home loan rates are tied to the Marginal Cost of Lending (MCLR). The MCLR takes into account the marginal cost of funds which is linked to deposits and other sources of funds for banks.
The rate on your loan is usually expressed as ‘MCLR + x per cent.’ MCLR rates have to be reviewed and declared once a month. These are overnight, one-month, three-month, six-month, one year, two-year, three-year and five-year rates. The RBI further requires that a reset of the interest rates of loans based on the MCLR shall be at least once a year.
Based on current MCLRs of different banks, current home loan rates are as follows:
|Bank||Below 30 lakh||Above 30 lakh|
|State Bank of India||8.45%-8.75%||8.60%-9.00%|
|Kotak Mahindra Bank||8.60-8.70%||8.60%-8.70%|
Banks also offer fixed rates, but these are usually higher. ICICI Bank offers a fixed rate of 9.95% for the full tenor for a home loan of less than Rs 30 lakh. For higher loans, it offers a fixed rate of 10.05%-10.3%. Axis Bank offers a fixed rate for the full tenor of a home loan at 11.75%, regardless of the amount. Banks offer part-fixed, part-floating rates where the rate is fixed for the first few years.
It is usually cheaper to take a floating rate unless you expect interest rates to rise dramatically.
How long are home loans for?
Home loans are usually given for tenors ranging from 5 years to 20 years.
Does who you are, make a difference?
Interest rates can also fluctuate according to ‘who you are.’ For instance, lower rates are charged to salaried borrowers than self-employed ones. Women are also charged lower rates. Banks also charge lower rates to ‘small’ borrowers, typically those borrowing less than Rs 30 lakh.
Your status can also affect the loan approval process. Banks typically ask for salary slips if you are employed along with bank statements showing salary credits. For self-employed persons, Income Tax Returns for several years are asked for.
What is the security?
Usually, the house you buy with the loan is taken as security. The house is mortgaged with the bank until you repay the loan
These usually lie in the range of 0.5-1% of the home loan amount. However, you can bargain this down. Banks often ask you to pay a part of the processing fee, before your home loan is sanctioned. If your application is rejected, you can lose out on this advance amount.
What will my EMI be?
You can use our free calculator to figure this out.