Lending benchmark rate
Banks use RBI’s repo rate as an external benchmark, whereas NBFCs use PLR (Prime Lending Rate) for determining housing loan interest rates.
The credit score
Lenders can use the credit score to analyze the applicant’s past debt repayment record and overall creditworthiness. A high credit score means the borrower is more likely to repay the loan on time. Consequently, the lender may charge them a lower housing loan interest rate. In case, your credit score is on the lower side of the spectrum, you can still improve your score by following the best practices.
Income of the applicant
A salaried applicant at a reputable company will often get better interest rates than a self-employed applicant because lenders assume low credit risks when borrowers have a regular source of income.
The property’s condition and location
A property’s location, age, condition, and amenities also affect its resale value, which leads to lower interest rates on mortgage loans.
How do you calculate the interest rate on a home loan?
Home loan interest rates can be calculated in several ways:
Method 1: Flat rate
For example, if one takes out a home loan with a 20-year tenure, he or she will pay a fixed interest rate for the duration of the loan.
The following formula could be used to calculate the EMI using this flat rate method:
The EMI is calculated as (Principal + Total Interest) / the loan term in months.
Method 2: Reducing balance
With the reducing balance method, interest is not charged on the principal component already paid with EMIs. As a result, the outstanding balance decreases as time goes on.
Under this reducing balance method, the following formula could be used to calculate the EMI.
In mathematics, EMI is defined as [P x r x (1+r)^n]/[(1+r)^n-1]
P is the principal, r is the interest rate, and n is the number of instalments.
Calculating a home loan
EMI calculators are available from financial institutions that make it easy to calculate EMIs and to break down interest payments in detail. Navi’s Home Loan EMI calculator allows you to calculate your monthly and yearly EMIs. Just enter the loan amount, interest rate, and tenure and you’ll receive the EMI value.