How Does Home Loan Interest Rate Impact Your Budget?

Having a home and that too your own gives you so much of liberties and privileges that are not the case in rental accommodation. What it does great is by eliminating the obligation of switching from one place to another which is the norm though while staying in a rented flat. Given that home has so many mental and emotional comfort attached for individuals, banks and housing finance companies (HFCs) join the initiative of providing a home loan. You can get an impressively high loan based on your repayment capacity as well as the cost of the property to be bought by an individual.

As the loan comes with an interest rate, it can have a bearing on your budget. If you don’t get a summation of home loan interest rate in advance, you could be in the midst of uncertainty in the future. This could only lead you to commit mistakes which can prove costly in the end. Let’s check out why it is necessary to gauge the effect of rates.

Effect of Interest Rates Charted Out

The effect of the rates can be understood through the following points.

A Big Determinant to the EMI You are Likely to Pay - The rates charged by the lender would dictate very much the quantum of EMI, abbreviated for Equated Monthly Installment. Greater the rate of interest higher would be the monthly installment and vice-versa. It clearly means the interest rate influences the EMI directly. If you can get a feel of the likely EMI, you can assess its impact on your budget correctly.

Calculates Interest to be Paid Over the Loan Term - The interest rate would also play a vital role in deciding the amount of interest to be paid over the course of a loan. So, if the rate of interest is greater, you would pay much more interest compared to when the rate is lower. Getting the idea of the interest payable over the course of a loan, which can be up to 20-30 years, would help you figure out whether it’s a profitable option for you or not.

How Can You Check the Extent of EMI and Interest Payable Using the Interest Rate?

You can check the home loan EMI calculator to figure out the installment you are likely to pay over the course of debt. The calculator helps compute the installment based on the amount of loan, tenure and interest rate. You can also get to see the total interest you will pay to the lender.

Calculation Methodology of the Interest Rate

The rate of interest is arrived with the addition of the Marginal Cost of Lending Rate (MCLR) and spread. It’s the 1-year MCLR based on which the rate of interest is decided. The spread is further added to the MCLR to arrive at the lending rate. The spread is contingent on the loan amount, credit history of an individual, etc. The loan rates would remain the same for one year when the reset takes place. Yes, the MCLR can change can every month but the rate of interest would remain the same for one year. So the MCLR which will be there at the time of rate reset will go on to decide the rate of interest.