The interest rate on home loans vary based on a lot of different factors. It not only differs from bank to bank but also person to person. Home loans are long term loans with a tenure of around 20 to 30 years at once depending on the principal amount. The important factor to have a smooth home loan repayment lies with the interest rate on which the bank charges. A difference of as low as 0.25% - 0.50% in the home loan interest rate can cost you around Rs. 2 lakhs up and over the principal amount. It is therefore advisable to know how are home loan rates determined by the lenders. This article will help you understand both, the factors that affect home loan rates of interest and how you can reduce them for yourself.
The Factors that determine home loan rates:
Prime Lending Rate (PLR): PLR is the reference rate of interest that banks use to assess interest rates on various products. Many banks mention interest rates in the following format. PLR + 0.5%. In this case, if the PLR of a particular bank is 8%, the rate of interest for their housing loan would be 8.50%.
Cash Reserve Ratio (CRR): CRR is the minimum percentage of the total deposits made by the customers that the bank has to hold as reserves. This can either be in the form of cash or as deposits with the RBI. The higher the CRR, the higher the interest rate that a customer pays. This is because the amount of liquidity in the system reduced with an increase in CRR.
Repo Rate: Repo Rate is the rate of interest at which the Reserve bank of India lends money to other banks. Quite naturally, the leaser the rate at which banks get their loan, the lesser the rate a customer pays. Therefore, lesser the repo rate, lesser the rate of interest for the end customers.
Reverse Repo Rate: This is the exact opposite of ‘Repo Rate’. Banks lend to the Reserve Bank of India at this rate. The banks are very happy to lend to the RBI if the Reverse Repo Rate is high. This means that the bank would gain attractive profits, which may then be passed onto customers in the form of lower interest rates.
Statutory Liquidity Ratio (SLR): SLR is the reserve required for commercial banks to maintain. SLR can be maintained in the form of gold, government securities, etc. Only after the SLR has been met can a bank offer credit to its customers.
Benchmark Prime Lending Rate (BPLR): BPLR is the rate at which a bank lends money to its customers. The RBI replaced the BPLR as banks often loaned money at extremely low interest rates. With this in place, no bank can lend below the BPLR. This can visibly affect the interest rate that the bank offers a customer. Higher the BPLR, the higher the interest rate that a customer has to pay.
This is how are home loan rates are determined based on the above mentioned points. However, some other factors also affect the way home loan rates are determined that include Loan Amount, Property Value, Employment Status, Credit Score, Gender, and Income.