Owning a home is a significant milestone. However, given the increasing property prices, most people take the home loan route to arrange the funds needed to buy a home. Home loans are financial products that banks and NBFCs design to help potential homebuyers buy a home.

These loans are repaid through home loan EMIs. Each EMI constitutes a principal and an interest component. The interest component of the loan determines the total interest payout and the total cost of borrowing funds. The home loan interest rate that a borrower gets offered affects the home loan EMIs, the interest component of the loan, and the total cost of borrowing funds. High home loan interest rates lead to high home loan EMIs and high total interest outgo. On the other hand, a low home loan interest rate helps keep the loan affordable and easy to repay. 

Let us now understand the impact of home loan interest rates on EMIs. 

Home Loan EMI Calculation Formula 

Home loan EMIs are calculated using the following formula: 

Home Loan EMI = P x R x (1+R)^N / [(1+R)^N-1]

Here, 

P is the principal amount, 

R is the monthly interest rate, 

And N is the loan tenor in months. 

This formula has three variables: the loan amount that you wish to borrow or qualify for, the number of years you need to repay the loan, and the rate of interest you get offered. To understand the effect of the home loan interest rate on loan EMIs, let us see how a change in interest rate affects home loan EMIs when the other two variables are kept constant. 

Let’s imagine Mr. A bought a Rs.50 Lakh home loan for 20 years at an 8.5% interest rate. In this case, his EMI would be Rs.43,391 and the total interest payout would be Rs.54,13,879, making the final cost of borrowing funds Rs.1,04,13,879. However, if Mr A had been offered the same loan for 20 years at a 9.5% interest rate, his EMIs would have been Rs.46,607 and the total interest payout would have been Rs.61,85,574, a marked difference. In conclusion, when it comes to big-ticket loans such as home loans, even a small difference in the interest rate can make a significant difference to the EMIs and the cost of borrowing funds. 

Home loan applicants must, therefore, make every effort to secure home loans at the lowest home loan interest rate possible. Here are some things borrowers can do to avail of a low-interest-rate home loan.

Simple Tips on How to Secure a Low Home Loan Interest Rate Loan

1. Use a home loan EMI calculator to calculate the loan amount you qualify for. Applying for a loan amount one qualifies for based on their income and current liabilities enhances one’s ability to negotiate for low home loan interest and other beneficial terms and conditions. The housing loan calculator is straightforward to use and also free.
2. Maintaining a high CIBIL score will also work greatly in your favour. A high CIBIL score indicates high repayment capacity and low chances of a loan default. A CIBIL score above 750 is mandatory. 
3. Paying a high down payment will reduce the loan amount, leading to low loan EMIs and higher affordability. It will also allow you to negotiate for a lower rate of interest on home finance. If you are planning to apply for a home loan in the near future, start saving and pay as high a down payment as possible. 
4. Maintain a low debt-to-income ratio. If you wish to secure a profitable deal on your home loan, keep your debt-to-income ratio low. If more than 40% of your total income is already being diverted to the repayment of debt, securing a low-interest rate home loan will be challenging. 
5. Invest in a premium property. Home loans are secured by the property bought with the funds secured under home finance. Thus, the quality of the collateral is crucial. Properties built by reputed builders or located in premium locations help fetch better home loan interest rates. 
6. Lastly, do research. From banks and NBFCs to private lenders, the market is filled with options to choose from. Doing proper primary research, reaching out to at least a few different lenders, and negotiating with them will help you understand what you are eligible for and negotiate accordingly. 

To Conclude

In conclusion, home loan interest rates have a direct impact on loan EMIs, the total cost of borrowing funds, and the overall affordability of a home loan. To secure a low-interest rate home loan, make higher down payments, maintain a high CIBIL score and a low debt-to-income ratio, and do proper research.