When an individual is opting for Home loan Ahmedabad, he or she must take into consideration the interest rate charged by different lenders. This way, an applicant can understand which financial institution can be the best choice, as the interest rate on home loan can determine different lending terms of the loan throughout the repayment tenor.
Importance of home loan interest rate
Several factors, like the credit score of a borrower, a property’s location, and its loan-to-value ratio, can determine the current home loan rates offered by a financial institution. As a borrower will be paying a substantial sum as interest in addition to the principal amount borrowed, this rate charged impacts the home loan significantly.
A brief look at how the interest rate’s relation with different aspects of a home loan plays a crucial role in this regard has been provided below:
- Relation between interest rate and repayment tenor
Depending on the total repayment tenor, the interest rates charged by a financial institution can fluctuate significantly. In general, the rate charged for short-term is comparatively lower than the long-term ones.
When a lender is sanctioning credit for an extended repayment tenor, this prolonged window remains a severe risk factor of it. For instance, there is an increased chance of the debtor defaulting in the long run. That is why a higher interest rate on home loans is levied so that a financial institution can compensate for the losses due to outstanding debt amount.
- Relation between interest and home loan tax benefits
The EMI amount a borrower pays is made of two distinct components – principal and interest. Consequently, the taxation-related laws of this country have different parameters for these two aspects if a borrower is claiming a deduction.
To elaborate, section 24b of the Income Tax Act has provisions to allow a borrower to claim a tax deduction on the interest paid towards a home loan. However, the upper limit for such claims has been limited up to Rs. 2 Lakh per annum for a self-occupied property, whereas no such limit is in place for let-out properties.
Notably, Section 80C of the Income Tax Act has provisions for tax exemption on the repayment expenditure towards the principal portion of a home loan.
- Relation between interest rate and EMI
A higher interest rate will cause a borrower to pay a hefty amount every month. Consequently, this hiked EMI can cause a financial burden on an individual, increasing the risk of default.
Missing out on a home loan EMI payment can negatively affect the creditworthiness of a borrower. For instance, his or her CIBIL score can reduce drastically, jeopardising the scope of fast loan application approvals in the long run.
Therefore, it is always crucial for a borrower to compare different lenders to ensure which financial institution offers the lowest interest rates. Notably, as a candidate with a higher credit score is considered a low-risk applicant by the lenders, he or she can utilise this leverage to negotiate with them about lowering the interest rate.
How to calculate home loan EMI using the interest rate of a home loan?
The EMI amount a borrower has to submit during his or her repayment tenor is calculated using a formula:
EMI = P x R x (1+R) ^N / [(1+R) ^N-1]
In this calculation,
- P is the loan amount
- R is the rate of interest as charged by the lender
- N is the repayment tenor in months
However, manual calculations can be time-consuming and is prone to erroneous results. Therefore, it is always advisable to use the home loan EMI calculator on a lender’s website. An applicant can use it in a few simple steps:
Step 1: Open the official site of the financial institution
Step 2: Navigate to ‘Home Loan EMI Calculator’
Step 3: Customise the desired loan amount
Step 4: Feed in repayment tenor of this loan
Step 5: Enter the rate of interest this lender is charging for sanctioning credit
Following this, this calculator will display monthly instalments payable in a matter of a few seconds.
Several financial institutions extend pre-approved offers to their existing clients for home loan and LAP. A borrower can easily check the available pre-approved offers by entering his or her name and contact details in a lender’s portal.
Therefore, the interest rate on home loan a financial institution is charging can significantly impact the financial health and repayment plan of a borrower, as stated above.