Before applying for a home loan, a customer looks at many factors like the interest rate charged. The interest rate on any loan varies across the market because of the multiple variables affecting it. Based on these factors, arriving at an estimated interest rate is easy.
Here, we will guide you in calculating the home loan interest rate in just a few steps.
Factors Affecting Home Loan Interest Rate
The interest on home loans changes depending on many factors. These factors and how they affect the interest rate are discussed below.
Marginal Cost of Lending Rate
The MCLR is the minimum interest rate that every bank charges. Any financial institution cannot provide credit below the MCLR. The interest charged on home loans changes as the MCLR is reviewed annually.
The credit score is an individual’s track record of paying his EMIs, utility bills, etc. The credit score increases when these payments are made on time. People with a high credit score have a chance of receiving benefits like lower interest rates or higher amounts of loans.
Type of Interest
Home loan customers can choose the kind of interest rate they want on their home loan. Customers can choose between three different interest types which are fixed home loan interest rates, floating home loan interest rates, and mixed home loan interest rates. The interest rate is fixed for the entire loan tenure under the fixed interest rate. The interest rate changes as per the changes made by RBI under the floating interest rate. The interest rate remains fixed for a pre-decided tenure and then becomes floating under the mixed interest rate.
Type of Employment
Financial institutions require a guarantee that timely payment of the loan will be made. This is acquired by getting proof of employment from the customer. An applicant with a high-income level comes across as a safe borrower who could repay on time. While a self-employed applicant may come across as a risk.
Tenure of the loan
You will have to pay a higher interest rate for a longer tenure on your home loan, even though the EMI for a longer tenure loan is smaller. The interest rate on a home loan with a shorter repayment tenure is lesser, even though the EMI will be higher.
Methods to calculate home loan interest
Once you are ready with the information listed above, the calculation of the home loan interest rate can be done in just a matter of seconds. Calculate the interest on home loans in the following methods.
1. Manual calculation: You can calculate the home loan interest rate and EMI manually by using the EMI calculation formula.
EMI = [P x R x (1+R) ^n] / [(1+R)^ n-1]
P = Principal loan amount the borrower wants
N = Loan tenure (calculated in months)
R = Interest rate (calculated in months)
The rate of interest on a home loan is calculated monthly.
R = Annual Rate of interest/12/100
For a rate of interest of 7.2% p.a., r = 7.2/12/100 = 0.006
If a borrower applies for a home loan of Rs. 10 lakhs at an interest rate of 7.2% for a period of 120 months, the EMI calculation in this case is:
EMI= ₹10,00,000 * 0.006 * (1 + 0.006)120 / ((1 + 0.006)120 – 1) = ₹11,714.
The total amount the borrower has to pay is ₹11,714 * 120 = ₹14,05,703 and the interest amount will be ₹4,05,703
You can use this formula to calculate the interest rate on your home loan, however, this is a tedious and time-consuming calculation, and is prone to errors. Even a small calculation error can bring significant variations in the answer and give faulty results. A better option to calculate your home loan interest rate is using the online EMI calculator.
2. EMI Calculators online: A smarter way to calculate the interest rate on a home loan is by using an online home loan EMI calculator. You can find an online EMI calculator on the website of various financial institutions.
Customers can conveniently calculate their home loan interest rate from the online EMI calculators available on the lender’s website. You can try different combinations of the principal amount, loan tenure, and interest rates to find the monthly amount payable for those combinations. It helps home loan customers to choose the best loan offer.