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Home Loan Interest Rate and Charges

What type of interest rate you should choose for your Home loan

Fixed Interest Rate:

  • As the name suggests, the fixed home loan interest rate remains constant throughout the loan tenure. It is not affected by market fluctuations. Since it is immune to changes, you will have to pay a fixed monthly installment for the entire loan duration.
  • After the completion of a certain period of loan tenure, you may opt to switch over to the floating home loan interest rate system from the fixed-rate system.
  • As a fixed interest rate system is not susceptive to changes it protects you against frequent market ups and downs. It helps you save a considerable amount in the long run in instances of an increase in lending rates.
  • However, if there is a rate cut, a fixed interest rate system will not benefit as its interest component is fixed and remains frozen for the entire loan duration.

Floating Interest Rate:

  • The floating home loan interest rate is subject to change depending on the market scenario. It is influenced by multiple market factors which also include RBI monetary policy and lending rate revisions.
  • The prominent benefit of optingfor a floating home loan rates is that it charges based on the latest rate. If rates reduce, you are likely to save a significant amount on interestpayment. Whereas if it increases, although rarely, you have to bear the higher interest charges.
  • It is recommended to choose a floating interest rate systemover the fixed-rate system.

Flat Interest Rate:

  • In a flat interest rate system, the interest is calculated on the entire loan amount throughout the loan tenure without considering the fact that monthly EMI payments gradually decrease the principal amount.
  • Thus, in a flat rate system even if you gradually pay the loan amount, the interest remains constant.
  • The computation involved in the flat interest rate method is easier as well as suitable for planning budget as the EMI remains same for the entire tenure. But opting for a flat rate system is not advisable because you end up paying a higher interest amount as compared to reducing interest rate option.
  • The Effective interest rate equivalent value for a flat interest rate is approximately two times higher.

Reducing Interest Rate:

  • In reducing interest rate also known as diminishing balance rate, interest is calculated on the outstanding loan amount.
  • In reducing the interest rate, with every EMI payment, the principal portion gets subtracted. Thus, the interest for subsequent EMI is calculated only on the balance principal amount.
  • The total interest paid in reducing rate loans is lesser than the flat rate loans. Hence, compare to flat interest rate, reducing home loan interest rates is the best option.

Types of Fees and Charges

Processing fees:

This is a one-time fee paid by a home loan borrower to the bank or NBFC for processing the loan application. The processing fee is subject to vary depending on the bank and particular loan scheme you apply for.

Foreclosure/Prepayment Charges:

If you wish to prepay your home loan amount before its intended tenure, the lender may charge the prepayment/foreclosure penalty. Foreclosure is full repayment of the outstanding loan amount in a single payment instead of monthly installments. Usually, there are no charges for foreclosure. But the fixed interest rate loans, in case of refinancing may require you to pay foreclosure charges.

Conversion/Switching fees:

This fee is applicable if you wish to switch your home loan to a different loan scheme to enjoy the benefits of the lower interest rates.

Charges On Account of Delayed Payments:

Delay in payment of EMI or interest is liable to attract an additional interest of up to 2% per month.

Cheque/ECS bounce charges:

If there is an ECS bounce or cheque bounce due to insufficient balance in the account, signature mismatch, or any other technical reason then the borrower is charged a penalty by the respective lender.

Incidental Charges:

Incidental charges are imposed to cover the costs, expenses, and charges involved in the recovery process of dues from a defaulting borrower.

Home insurance:

Home insurance is basically a Home Loan Protection Plan wherein the insurer is held responsible to clear outstanding home loan amount in case of unforeseen instances such as the death of the borrower, damage to property from natural calamities, or theft. Almost every bank or NBFC requires borrowers to apply fora Home loan insurance plan to secure their property as well as a family against unexpected risks.

Statutory/regulatory/Charges:

These include all charges applicable to Memorandum of Entry and Deposit, Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), stamp duty, or such other statutory/regulatory bodies. These charges are solely paid by the borrower. For more information on this visit the official website of CERSAI cersai.org.in

Indemnity Cost:

This is the cost borrower makes in advance to indemnify the lender for certain risks, like builder facing difficulty in getting approval, property tax yet to be paid completely by the seller, or some other.

Balance Transfer Charges:

If a borrower wishes to change his lender to avail lower interest rate then he/she is required to pay the home loan balance transfer fee to the current lender.

Disbursement Cheque Cancellation Charge Post Disbursement:

In case of loan cancellation by the borrower, the bank has to revoke the deposited amount from the borrower’s account. For this lender levies certain charges on the borrower which is called a Disbursement Cancellation Charge.

Increase / Decrease in Loan Term:

If you opt to change the loan tenure then you liable to pay certain charges. In case if you are capable to pay higher EMI, you can request a reduction in tenure and vice versa. Although many banks do not charge you for this.

Repayment mode swap Charges/PDC Swap:

If you want to swap/change your current home loan repayment mode or date then you need to pay this fee. It generally Rs500 per request.

Frequently Asked Questions (FAQs)

To bring more efficiency to the banking system over the years several benchmark lending rates regimes have been introduced. Depending on your home loan issuance and renewal date you can find out the linked interest rate systems for your loan.

  • Benchmark Prime Lending Rate (BPLR): This is an internal benchmark rate and applies to allloans or advances issued by banks up to June 30, 2010.
  • Base Rate: The Base rate system shall apply to all floating interest rateloans issued and renewed by banksbetween July 1, 2010, to March 31, 2016.
  • Marginal Cost of Funds based Lending Rate (MCLR): MCLR regime shall be applicable on all floating rateloans issued and renewed between April 1, 2016, to September 2019.
  • External Benchmark:All floating rate personal and retail loans (housing, auto, MSE (Micro Small Enterprises) extended by banks with effect from October 01, 2019, plus, the (Medium Enterprises) floating rate loan issued by banks from April 01, 2020, shall levy interest rates under External Benchmark regime.

The standard computation method used to calculate the rate of interest on loans sanctioned after October 01, 2019, is as mentioned below:

The effective interest rate applicable on loans linked to the external benchmark is made of two components including the RBI’s repo rate and the spread.

Effective Interest Rate = repo rate + Spread

Where

Repo rate is the rate of interest at which RBI lends money to commercial banks.

Spread is a combination of the following elements:

  • Operating costs and Profit Margin: These include the operational and administrative expenses banks spend on servicing the loan.
  • Credit Risk Premium: This refers to the borrower’s Risk profile and is subject to vary depending on his/her credit score.

As per Reserve Bank of India’s regulation, banks have the freedom to decide spread over and above the external benchmark. However, the credit risk premium can only be altered upon the considerable change in the borrower’s credit assessment. Moreover, the other components operating cost and profit margin can only be changed once in three years as the Spread resets periodically once in three years from the disbursement date.

You will be notified through the Website / SMS / Email/ letter as deemed appropriate.

Yes, you can change fixed-rate loans to floating rate loans on abiding to mutually agreeable terms with banks.

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