Different banks and financial institutions charge different interest rates on Home Loans from different persons. Interest rates on Home Loan determine the cost of the loan that you borrow.
So it is very important that you know the factors that influence your Home Loan interest and the ways that can help you in reducing the interest rate on your Home Loan.
Key Factors that Influence Home Loan Interest Rates
1. Benchmark Prime Lending Rate (BPLR) - Benchmark Prime Lending Rate is the interest rate that banks usually charge from its prime customers i.e. customers with good credit score. This interest rate is being used as a guide to calculate interest rates for other customers. It is a reference rate and is also known as Prime Lending Rate or PLR.
2. MCLR or Base Rate - Base Rate is the minimum rate below which banks are not allowed to grant a loan. In April 2016, Reserve Bank of India introduced Marginal Cost of Funds based Lending Rate (MCLR) to replace the base rate. It is an internal benchmark lending rate and is compulsory for all the banks.
MCLR is being revised every month to incorporate changes in repo rate and hence it ensures transparency and fairness in interest rates.
3. Repo Rate – Repo rate is the rate at which RBI provides money to the banks. If the RBI lowers the repo rate, the MCLR also gets lowered and vice-versa. Repo rate is used in the calculation of MCLR and hence any change in the repo rate affects the MCLR charged by the banks on your Home Loan.
4. Reverse Repo Rate - As the name suggests, Reverse repo rate is the rate at which RBI borrows money from the banks. This rate is used as a financial tool to control the money supply in the market. If the RBI increases this rate, banks tend to lend more money to RBI and hence fewer loans are disposed of to the public.
Any increase or decrease in the reverse repo rate has a direct impact on the interest rates charged to the end customers.
5. Statutory Liquidity Ratio (SLR) - SLR is the ratio of liquid assets to Net Demand and Time Liabilities (NDTL). Every bank is required to maintain a certain percentage of its NDTL as liquid assets in the form of cash, gold, government securities, etc.
SLR acts as a restriction on the lending capacity of the banks and in turn, affects its lending interest rates.
6. Cash Reserve Ratio (CRR) – CRR is the ratio of cash reserves maintained by the banks with RBI to their total deposits of customers. It is the minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves with the RBI.
Banks do not have access to that much amount of money for any economic activity or lending purposes. This way it affects the final interest rate charged on your Home Loan.
Ways for Reducing Home Loan Interest
1. If you have taken a Home Loan before April 2016, you can get a lower rate of interest by shifting your loan to MCLR facility
2. Increasing your monthly loan installment and making pre-payments of your loan installment can help you in availing a lower interest rate from your bank.
The Bottom Line
When you are aware of the factors that influence your Home Loan interest rate and the ways that can help you in reducing it. Then, you have a better chance of availing a Home Loan at a lower interest rate.