Updated: Jul 21, 2021
We explain why home loan borrowers may end up paying a higher home loan interest, in spite of the low rate quoted banks. Visit - Prestige City Sarjapur
With the repo rate now at 4%, home loan interest rates are below the 7% level. However, you'll not be eligible for this low rate of interest. So, it's crucial for home equity credit borrowers, to understand why they will find yourself paying a better home equity credit interest in spite of the lower rate quoted by a bank. In some cases, the bank may even revise the interest rate to a higher slab in the future, subject to non-fulfilment of certain laid-down criteria.
How does an increase in home loan interest rate impact the borrower?
“A rise in the interest rate increases the cost of acquiring a house. For example, a loan of Rs 40 lakhs, at a rate of interest of 7.25% every year, for 20 years, would mean an EMI of Rs 31,615 a month. The total amount you'd be repaying to the bank, would be Rs 75.87 lakhs. If the interest goes up to 7.5%, the monthly EMI becomes Rs 32,224 and you'll find yourself repaying Rs 77.33 lakhs – Rs 1.46 lakhs more, over the tenure of the loan. This is because, while the share of increase is extremely small, it gets compounded over an awfully long period,” explains Adhil Shetty, CEO, and BankBazaar.com.
An increase in the interest rate means that the total amount that you need to repay, also increases. Usually, this is often within the sort of an increased tenure. However, you can also reach out to the bank and opt for your EMI to be reset to a higher amount, so that you can reduce ore retain the same tenure.
How often do banks revise interest rates?
As per the Federal Reserve Bank of India’s (RBI’s) directive, banks are required to revise their external benchmark-linked interest rates, once every three months. Some banks adjust their lending rate immediately with the change within the repo rate, while some may roll in the hay hebdomadally or month or once every three months.
Why do some borrowers end up paying a higher rate despite low interest rates?
“Most people understand that a poor credit history and score, can make a loan more expensive. However, few realise that the same is true, if you do not have a credit score at all. The credit score indicates your financial history and your skill in handling credit. In its absence, the lender will haven't any way gauging how well you'll handle your finances, which can cause a better loan rate of interest,” says Shetty.
Banks may offer you the lowest rate on a home loan but there are several conditions attached to it and non-fulfillment can result in an increase in the rate. Several factors may impact your home loan interest rate and you need to stay aware of them.
“When the credit score of a borrower is not clear or low, they may end up paying a higher interest rate. The credit score shows the borrower’s capacity to continue paying EMI. Any decrease within the borrower’s credit score after taking the loan, will alarm the bank and push them to require immediate corrective measures, which might mean a rise in interest rates,” adds Amit Goenka MD & CEO at Nisus Finance
How to avoid a rise in your home equity credit rate of interest
Experts recommend some important tips which will assist you to continue enjoying a lower home equity credit rate of interest within the long-term:
Ensure that all your loan accounts have no overdue amounts.
Try to repay existing loans before applying for a home loan.
Do not apply randomly for a loan.
Avoid putting too many loan inquiries.
Examine your credit report regularly.
When applying for a home equity credit, you'll choose banks whose rate of interest variation, for borrowers with different risk categories, isn't significant. This will ensure that you do not land up paying a significantly higher interest rate, even if your credit score falls by a few points in the future.