10 Factors That Determine Interest Rate of Home Loan

10 Factors That Determine Interest Rate of Home Loan

Building or purchasing one’s own humble abode is a dream for many, and thanks to the easy availability of Home Loans, this dream can now come true with increased ease. However, before you go ahead to apply for a loan, we recommend you take some time to analyse the interest rate you will be paying for the same.

This is because, while your principal amount will more or less remain the same, it will be the rate of interest which will determine the overall cost of your loan. The higher the rate, the more you will be required to pay from your pocket and vice-versa.

To help you draw a fair analysis of the rates offered by different lending agencies and banks, we have listed down the factors that determine the interest rates on various Types of Home Loans.

  1. Bank Rate

The bank rate is necessarily the rate of interest at which the Reserve Bank of India (RBI) lends money to other banks. This money is usually given out for a longer time duration, ranging between 1 month and 12 months, without any collateral. These banks, in turn, offer loans to customers, often at a higher rate in a bid to make profits. Hence, when the Bank Rate increases, it results in a spike in Home Loan interest rates.

  1. Repo Rate   

The repo rate, also known as repurchase rate, refers to the rate at which commercial banks borrow money from the RBI. This money is usually acquired with the intention of losing the gap between the funds available with the commercial bank, and the demand for loans from customers. The lending period for this money is rather short, and ranges anywhere from two days to three months, against some security such as bonds. Repo rate is an efficient tool that helps the RBI to maintain liquidity in the market.

There are times when the RBI wishes to constrict the flow of money in the market, and thus increases the repo rate. This, in turn, results in a hike in the interest rates for Home Loans.

  1. Cash Reserve Ratio

Cash Reserve Ratio (CRR) is a monetary tool that helps control the supply of money in any economy. By definition, it is nothing but a fraction of the total deposits in a bank that the RBI holds as a reserve. This simple manoeuvre ensures that the banks do not run out of money at any given point in time. Needless to mention, as the CRR increases, the cash at lender’s disposal decreases thus resulting in a hike in interest rates.

  1. Inflation

Inflation is the rise of general prices of goods and services. As can be understood, inflation reduces the purchasing power of money and thereby gives way to higher interest rates.  Moreover, the overall unavailability of liquid funds pushes the interest rates even higher. Hence, availing a Home Loan during inflation may not be a wise decision.

Leave a Reply