GUIDESPERSONAL LOANS
What is the Interest Rate on Home Loans and How Does it Work?
5 MIN • 
LAST EDITED BY ULFATH JOAD ON AUGUST 21, 2024.
LAST EDITED BY ULFATH JOAD ON AUGUST 21, 2024.
GUIDES LAST EDITED BY ULFATH JOAD ON AUGUST 21, 2024.
The home loan interest rate is one of the most important aspects of a housing loan. It determines how much financial liability you take on for the next 10 to 15 years. Naturally, the lower the housing loan interest rate is, the better, because it means you will likely have to pay lower interest overall.
When you avail a home loan, you can borrow a chunk of money from the bank or financial institution to pay for the cost of building or buying your house. You will have to repay this sum in instalments over the next 10 to 15 years or so, depending on the repayment tenure you choose. In return, you will pay the sum back in small instalments. Also, to offset the risk that the lender takes on because of this, you will have to pay additional interest on the principal sum borrowed.
The home loan interest rate is the rate at which interest accrues on the amount you have borrowed via a home loan. This rate of interest can be one of the following two kinds.
Here, the home loan rate is fixed at the time of borrowing, and it remains unchanged throughout the tenure of the loan.
Here, the home loan rate is not fixed. Rather, it fluctuates based on the benchmark repo rates in the market.
The home loan interest is applied on the principal amount borrowed, across the repayment tenure of the loan. This is how the bank or the financial institution calculates the EMI that you need to pay. More specifically, the EMI is computed using the formula shown below:
EMI = P*R*((1+R)^n)/(1-(1+R)^n)
Here, P is the principal outstanding in the loan, R is the monthly rate of interest and n is the number of monthly instalments.
Using this formula to manually compute the home loan EMI, however, can quickly get tedious. Here’s where a home loan EMI calculator can help. This online tool will give you more clarity on how the home loan interest rate impacts your EMI. All you need to do is input the key details needed, like your home loan principal, the interest rate and the repayment tenure. You can then see how the EMI and the amortization schedule changes as the interest rate fluctuates, by simply entering different interest rates in each iteration.
Because the home loan interest rate impacts the amount of EMI you’ll pay over the long term, it is essential to take measures to optimize the lending rate. Here are some things you can do to ensure you get lower interest rates or the advantage of lower EMIs over the repayment tenure.
With this, it’s a wrap on the fundamentals pertaining to one of the core concepts about home loans. Understanding how housing loan interest rates work can help you figure out what the best home loan offer for you is. And now that you know the basic and the finer details of the workings of a home loan lending rate, you can plan your dents in a more informed manner.
A 3% home loan interest rate is extremely good. However, in the Indian financial market, housing loan interest rates are typically in the range of 7% to 10%. So, a 3% interest rate on home loans in India is currently not a realistic option.
There are some easy steps you can take to increase your chances of getting a low mortgage rate. Some of these steps include ensuring that you have a good credit score, negotiating with the lender in case you have a pre-existing relationship with them, and opting for a floating interest rate in case the market benchmark rates are falling.
