Owning a house is a dream and a motivation to save money. People use their lifetime savings to realize the dream of owning a house. But, not everyone would have saved enough money to purchase or construct a house. That’s when a home loan comes handy. Home loans facilitate the funding of construction or purchase of a house.
Funds received as home loans can be utilized only on housing related activities like construction, purchase and renovation of house. Home loans are offered at a particular rate of interest, based on factors like credit score and loan amount. Home loan interest rates can either be fixed or floating. In floating interest rate, interest rates are revised on the basis of factors like RBI’s latest monetary policy and inflation.
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Marginal Cost of funds based Lending rate, MCLR, refers to the minimum rate of interest below which a bank cannot lend, except in some cases permitted by the RBI. It is an internal benchmark or reference rate for the banks set by RBI. MCLR varies across banks.
MCLR is calculated on the basis of cost of raising funds for the bank including the cost of maintaining CRR/SLR, operating costs and tenor premium.
MCLR is closely linked with the repo rate and it improves the transmission of interest rates to borrowers when RBI reduces repo rate.
MCLR of the popular banks and NBFCs is given below:
Mark-Up, also referred to as spread or margin, plays a major factor in deciding home loan interest rates. The actual home loan rate will be a summation of bank’s MCLR and Mark-Up. The Mark-Up differs vis-a-vis women borrowers, Loan-to-Value ratio LTV, amount of loan sanctioned and if the applicant is salaried or non-salaried. Spread is the cushion which a lender enjoys over the benchmark rate to fund cost of operations and profitability.
SEE ALSO: Home Loan Interest Rate
Loan amount too plays a very important factor in deciding the home loan interest rates. Generally, lenders tend to charge a higher rate of interest on higher loan quantum. This is because there is risk involved in lending higher loan amounts.
The loan-to-value ratio, LTV, is a term used by lenders to express the ratio of a loan to the actual market value of the house being constructed or purchased. The term LTV is generally used by banks and developers to represent the ratio of the first mortgage line in terms of a percentage of the total value of the property.
LTV represents the maximum loan amount that can be sanctioned. For example, the LTV offered by a lender is 80% and if the property proposed for purchase costs Rs 1 Crore, then you would get Rs 80 Lakhs as the loan amount.
LTV varies with the loan amount. Higher LTV is offered on lower loan amounts. LTV decreases with increase in loan amount as the risk increases with increase in loan quantum.
Women borrowers are offered home loans at a lower interest rate. Hence, it is advisable to include spouse or mother or daughter as a co-applicant when availing home loans. Stamp duty is lower for women borrowers and varies across states. So, including a woman in home loan application has a lot of benefits.
Banks and NBFCs charge a higher rate of interest for self- employed. This is because these applicants don’t have a fixed and regular source of income unlike the salaried. As usual, if lenders are ready to lend to high-risk individuals, then it would be at a higher rate of interest. The same thing applies to self employed. However, the difference in interest rates is very small.
If applicants are of high-risk, then banks would lend at a higher rate of interest. High risk individuals are those who have a bad credit history.
Risk is involved not only with individuals having poor credit track record, but also with individuals applying for higher loan amount. Loans above Rs 30 Lakhs are generally considered risky.
The below table shows home loan interest rate offered by popular lenders:
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