Taking a new home loan? Check this out

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New home loan

New home loan: Introduction

Buying a home in India is a special feeling. With the increasing cost of housing properties, it has become mandatory for most people to take a home loan. Buying the right property is crucial. Similarly, taking the right loan and figuring out an EMI you would be comfortable paying is essential. Do your homework to find the best possible deal for your home loan. Today, we will help you with all the important stuff related to a new home loan.

New home loan: How to reduce your home loan EMI amount?

It does not matter how much you earn per month - paying a large EMI amount is uncomfortable. Hence, before you take a home loan with a bank or NBFC, you must find ways to reduce your home loan EMI amount. Below are some easy and simple ways to do so:

New home loan EMI: Reduce the interest you need to pay- The easiest way to reduce your EMI is to take a loan at a lower interest rate. For example, if you take a home loan of Rs 50 lakh at a 7.5% interest rate for 20 years, your EMI will be Rs 40,280. Everything being the same, if the interest rate is 6.5%, you pay an EMI of Rs 37,279. 

New home loan EMI: Making a larger down payment- You can reduce your EMI if you make a larger down payment and reduce your loan amount.

Taking a new home loan: Choose a longer tenure- If EMI is coming high and you are not comfortable, you can try to increase the tenure to lower the EMI. In the above example of a 7.5% interest rate, if you change the duration from 20 years to 25 years, your EMI will reduce from Rs 40,280 to Rs 36,950. Please note - you will end up paying higher interest with higher tenure. In the latter case, you pay Rs 60.84 lakh as interest. In the former case, the total interest paid will be only Rs 46.67 lakh.

New home loan strategy: Step-down EMI plans- These are for those who are comfortable paying higher EMIs today but would like to pay lower EMIs later - to increase financial responsibility, nearing retirement, or for some other reason. In this option, you choose to pay a higher EMI in the beginning and decrease the EMI amount gradually.

Home Saver Loans: If you have a fluctuating income and that is the reason you want to reduce your EMIs, then you can go for home saver loans. These are similar to the overdraft facility. With this option, your minimum obligation is to pay only the monthly interest. If you are tight on budget, you can pay only the minimum for those months. Whenever your earnings get to a comfortable level, you can pay a higher amount to reduce the outstanding principal amount.

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How to calculate the EMI from new home loan interest rates?

Calculating EMI allows you to make an informed decision - whether taking the loan is a good option for you or not. You can use EMI using online EMI calculators or using the below formula to calculate EMI:

EMI = P x R x (1+R)^N / [(1+R)^N-1

P = Principal loan amount or loan you take

N = loan tenure

R = The interest rate at which you are taking a loan. The interest rate is calculated per month. It means that if your interest rate is 7.2%, R would be (7.2)/(100*12) = 0.006

Assume you take a loan of Rs 10 lakh at an annual interest rate of 7.2% for a tenure of 10 years, your EMI will be calculated as below:

EMI = Rs 1000000 * 0.006 * (1 + 0.006)120 / ((1 + 0.006)120 - 1) = Rs 11,714.

Types of home loans

Before you go ahead and take a loan, you must know the two options the bank will offer you. You will have to select one of the two for your loan application - fixed or floating home loan. 

In the fixed loan option, the interest rate remains the same throughout the loan tenure. In the floating interest rate option, the change in the bank's MCLR will affect your EMI amount. If the RBI raises the repo rate, the bank will pass the rate hike to you and that would raise your EMIs.

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How are home loan interest rates decided?

Home loan rate comprises: Bank’s margin + external benchmark rate

Banks consider various factors while calculating the interest applicable on home loans such as your Credit Score, Loan Amount, Loan to Value ratio, Income level etc. These factors can vary for different individuals. These factors impact the bank’s margin. However, the factor that remains constant for all customers is the bank’s External Benchmark Rate.

What is the external benchmark rate?

According to RBI, all floating rate home loans extended by banks from October 1, 2019 must be  linked to external benchmarks such as the Repo rate, 3 months and 6 months treasury bill rates and any other benchmark market rate published by the Financial Benchmarks India Private Ltd (FBIL). Hence, while this part remains constant, you can reduce your overall home loan by maintaining a good credit score and income level.

Home loan: These 5 banks offer the lowest interest rates

In this section, we will look at banks offering the lowest interest rates. However, please note that the interest rate varies from person to person. It will depend on your risk profile - CIBIL score, gender (women get a loan at a lower rate), salaried or self-employed, and loan amount. If your CIBIL score is good, you may get a loan at a lower rate. Below are the banks that have the lowest home loan interest rates:

BankHome Loan Rate
Indian Overseas Bank7.15% onwards
Central Bank of India 7.2% onwards
Bank of Maharashtra7.3% onwards
Punjab National Bank7.4% onwards
Bank of Baroda7.45% onwards

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