What Are the Current Home Loan Interest Rates?
On October 5, 2016, the main headline of almost every newspaper was that the Reserve Bank of India (RBI) had cut the repo rate. The repo rate is the rate at which the central bank lends money to commercial banks in case of a shortfall.
Due to this much needed step taken by the RBI, there was a 30–50 bps cut in home loan rates, where bps refers to the common unit of measure for the interest rate. However, the transition has been slow, as banks did not pass on the benefit to end users immediately.
How are Home Loans Interest Rates Decided in India?
You might have hear of floating and fixed rate home loans. But, have you ever paused to think about how banks fix their interest rates? Unfortunately, not all borrowers know and are even not interested to know that the interest rate charged by banks comprises of two components: the base rate and the spread.
Base Rate: Base rate is the minimum rate set by the Reserve Bank of India, below which banks are not allowed to lend to customers. However, individual banks fix the base rate based on the broad guidelines issues by the RBI. The system of base rates was introduced on July 1, 2010, replacing the previous Benchmark Prime Lending Rate (BPLR). The concept of base rate was introduced to enhance transparency in the credit market, making sure that the banks pass on the lower cost of funds to customers.
Spread: Spread comprises the additional percentage points added to the base rate to arrive at the final lending rate. Calculated by banks, the spread is based on their operating costs, profit requirement, risk and credit loss. It is basically decided at the time of loan application, depending on your loan type, credit profile, etc.
Borrowers only benefit when banks announce a cut in the base rate, not when they cut the spread. The base rate is more transparent than the spread and is reviewed periodically, while spread is not uniform for all customers. It is an internal decision of the bank while fixing the final lending rates. A cut in the spread rate benefits only new customers, which most banks use as a tool to attract more customers.
Types of Interest Rates Prevailing in India
- Fixed Interest Rate: Preferred for the safety it provides against market fluctuations during a predetermined time or loan tenure, a fixed rate home loan work as a shield against any increase in interest rates during an unfavorable economy. You will need to pay a fixed amount as EMI each month during a fixed tenure, which you have the liberty to choose. However, after that, your rate will shift to a current floating rate of interest.
- Floating Interest Rate: All floating rate home loans are linked to the base rate. Marginally cheaper, floating interest rates are slightly lower than fixed ones, since there are prominent chances of an increase, given that this rate depends on the market conditions, such as inflation or growth. The lender usually hikes or reduces the rate based on the market conditions which can turn out to be most beneficial during a low inflation period.
Which type of loan you should go for? It totally depends on your needs and future planning. If safety and certainty is the foremost concern, its best to opt for a fixed rate of interest, even at the cost of some interest rate premium.
