In India and worldwide, banks and financial institutions offer home loans to individuals who wish to buy or build their own homes. These loans can help you buy and build your ‘dream home’ at an affordable cost. Factors like the principal amount of the loan, the amount of the equated monthly installments (EMIs), the interest rate, and the tenure are some of the most important factors to consider when you apply for home loan.
The home loan interest rate is the first factor applicants check. There are home loans with a fixed interest rate. However, home loans also have fluctuating, variable, or floating interest rates. It means the home loan interest rate keeps rising and falling based on the market. Any rise or fall in the home loan interest rate can negatively or positively impact your EMI payment. As you apply for home loan, continue reading to understand how these interest rates impact your home loan and your financial position.
Change in Home Loan Interest Rate Through an Example
Let us assume you are an employee of a multinational finance corporation in Delhi. You want to buy your home in Gurgaon but cannot pay the entire amount to buy the house at once. Thus, you and your family decide to apply for home loan at HDFC Bank.
Here are all the details of your home loan:
- The amount of loan that you have applied for from the bank is Rs 30,00,000.
- The tenure of the loan is 20 years.
- You have selected a floating interest rate.
- The current home loan interest rate in the market, as per the policies of the RBI, is 9% per annum.
- Based on the information above, your EMI amount will come out as Rs 26,992.
Suppose the interest rate does not change for the initial 10 years after you decide to apply for a home loan. However, after the initial 10 years, the RBI changes its fiscal policies. The market reacts to this news by increasing the home loan interest rate by 0.25%. So, the new interest rate on your HDFC loan will be 9.25% per annum. The changed details are as follows:
- The outstanding loan amount will be Rs 21,30,777
- The new home loan interest rate is 9.25% per annum
- The remaining tenure of the loan is 10 years
- Based on the revised information, the amount of EMI will be Rs 27,513
When you compare the equated monthly installments of the two periods, you see an increase of Rs 521. While this is a small increase, you will see a huge change when you multiply this one EMI by the remaining number of EMI. Any bigger increase in the interest rate can lead to a bigger change in your EMI amount.
Understanding the Effect of Changes in Home Loan Interest Rate
Here is a more generalized view that can help you easily understand the impact of interest rate fluctuations before you apply for home loan:
- Changes in the home loan interest rate cannot be predicted or controlled directly by anyone or anybody, not even the RBI. These fluctuations occur due to the market’s reaction to the modifications made in the RBI’s fiscal policies.
- RBI has a bi-monthly policy initiative, because of which there is a change in home loan interest rates almost every month.
- A fall in interest rates means that you pay less money, but the real dilemma arises when there is an increase in home loan interest rates.
- If the home loan interest rate increases, the amount of your EMI increases as well.
- To maintain financial stability amidst the changing home loan interest rates, lenders often allow you to change your loan tenure while keeping your EMI constant.
- Overall, the uncertainty of the EMI and total repayable debt can disturb your finance management to a great extent.
Floating interest rates can provide relief at some times. However, it also hits your financial stability when there is a rise in the rate. Considering both the pros and cons of this type of home loan interest rate, it is advised that you apply for home loan after thoroughly evaluating your risk appetite and financial strength.