Factors that Impact the Interest Rate of Home Loans

Home Loans

Once you take a home loan from the bank, you are expected to pay the interest. The interest rate that you pay is the cost of credit and it determines the cost of taking money from the bank. So, the common question that arises in almost every debtor’s mind is how the interest rate is set by the lenders.

Let’s take a glance at some of the factors that often impact the interest rate of the home loan:

  • Marginal Cost Fund Based Lending Rate (MCLR): Before understanding this, it is important to understand the concept of base rate. The Reserve Bank of India sets the minimum rate as the base rate and the banks grant the loan at a rate higher than the base rate. In order to calculate the benchmark lending rates for the banks, MCLR has been launched by RBI. So, according to the MCLR calculation, the base rate will be calculated which is influenced by factors such as tenure premium, the marginal cost of funds, the operating cost, and negative carry on account of Cash Reserve Ratio (CRR).
  • Repo Rate: This is the rate upon which the RBI offers money to banks in case of any deficit. The repo rate is used to control inflation and thus, when it is lowered or increased, it will have an impact on the interest rate of home loans.
  • Reverse Repo Rate: As the name suggests, this is the rate upon which the RBI gets money from banks. This helps to keep a tab on the money supply and so an increase or decrease in this rate can have a direct effect on the lending rates.
  • Cash Reserve Ratio (CRR): This is a fraction of the total deposits of customers that banks hold as assets with the Reserve Bank of India. This prevents the banks from running out of cash whilst meeting payment demands of the customers when they require money.
  • Statutory Liquidity Ratio (SLR): This is basically the ratio between NDTL (Net Demand and Time Liabilities) and liquid assets. By maintaining the SLR, banks cannot pool more money into the economy and this impact the interest rates of loans.

These are some of the factors that impact the interest rates of the home loans. So, before you go ahead and fill up the loan application form for an independent Villa in Ghaziabad, it is important that you cross-check with the interest rates.

(Source: http://nishantsinghh.kinja.com/factors-that-impact-the-interest-rate-of-home-loans-1797969347 )

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