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Housing loan is a lifetime decision. Whenever you are searching for a home loan, you should be careful and updated with the latest procedures of loan process followed by the loan providers – banks and other lending institutions. Choosing the right option for yourself is in your own hands.
Getting a home loan is very easy nowadays, what’s hard is making sure that you have right kind of interest rate on it. Any wrong decisions can lead to financial losses. Usually an interest rate is determined by the basic formula that involves Base Rate + Interest rate spread. Spread is the final rate of interest after adding some % to Base Rate. It is calculated based on the profit requirement of bank, tenure risk, operating cost of the bank and risk assigned with individual customer. In simple terms, the net interest spread is like a profit margin on which banks and other lending institutions runs.
Interest rates vary from institution to institution and presently range from 9.95% to 10.75 % for floating interest rate & 10.10% to 10.75% for fixed interest rate.
The RBI has banned pre-payment penalty on all floating rate loan, you can switch to a lower interest rate any time you like. This is not possible with fixed rate loans as you will need to pay a heavy prepayment penalty to switch to a lower interest rate.
There are three ways of offering home loan interest.
In this system, the principal, for which you pay interest, reduces at the end of the year. The interest is calculated on your outstanding principal amount at the beginning of every year.
In this system, the principal, for which you pay interest, reduces every month as you pay your EMI. The interest is calculated on the outstanding principal at the beginning of every month which is later deducted from your EMI.
In this system, the principal, for which you pay interest, reduces from the day you pay your EMI.
The interest on home loans in India is usually calculated on monthly reducing balance. Monthly reducing balance is the better option amongst the three as you get immediate credit for repayment and the interest component keeps reducing immediately on a monthly basis.
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