Owning a house is everyone’s dream and one of the most important life goals for many. It not only provides a sense of security and permanence but also brings stability in the life of homeowners.
Over time, the process of owning a house has got simpler with relaxed rules and availability of many finance options from banks and different financial institutes. Easier home loan process and housing loan eligibility for salaried and self-employed professionals have helped many to realise the dreams of owning a house.
However, availing the home loan facility has its own set of challenges, as it is one of the biggest financial commitments of one’s life, due to its long repayment period and large EMIs.
There are many factors one has to consider before taking the home loan because a little variation can have a big impact on your finances over the long-term period. Therefore, before you apply for a home loan, you should be clear about the lender’s policies, interest rate treatment, tenure of the loan and probable EMI amount.
Following are the three important factors, you need to consider which can impact your housing loan EMI.
Interest Rate or MCLR
Post April 1, 2016, all bank loans, including home loans, are linked to MCLR (marginal cost of funds based lending rate). This is the rate that commercial banks lend to the public and banks are not allowed to lend below this rate. The bank decides on MCLR, and is made up of four elements:
- Tenure Premium
- Marginal Cost of Funds
- Operating Cost
- Negative Carry on Account of CRR
The MCLR varies from bank to bank and is an improved version of the earlier used base rate system. Therefore, the bank which has the lowest MCLR can offer the lowest interest rate on the home loan.
Interest Rate Spread
The interest rate charged on any type of loans has two components, MCLR and the Spread. As discussed, MCLR is the rate, below which the bank cannot lend, and Spread is the margin based on the customer and the product-specific factors.
For example, the bank has a spread of 0.25% for its existing borrowers and 0.35% for new borrowers and the MCLR is 8.10%. So, the existing borrowers will end up paying 8.35% and new borrowers will pay 8.45% as the interest rate on the home loan.
MCLR Reset Period
Banks issue overnight, one month, three-months, six-months, yearly, two years and three years MCLR rates.
Usually, banks link home loan rates to six-months or one-year MCLR rates. So, if your home loan is linked to six-months MCLR, then the interest rate will get re-set only after the completion of six months period, in case there is any change in MCLR.
Therefore, your interest rate may go up or down, depending on the changes in MCLR, but your spread will remain the same for the rest of the tenure of the loan.
Even ticking all the housing loan eligibility criteria, home loans can get tricky sometimes with its complex interest rate calculation methodology. The smallest differences can wreak havoc on your finances as well as hamper you EMI repaying capabilities.
Accordingly, you should explore all the possible interest rate treatment scenarios and check home loan eligibility factors, before signing the dotted line.