Loan-to-value ratio or LTV is the ratio of the mortgage amount to the appraised value of the property. This is also done, to safeguard the banks’ interests. They would offer a maximum 80% of the market value of this property as loan, irrespective of your personal loan eligibility. See also: What to do if you default on your home loan?įor property appraisal the banks will send a team of experts to evaluate the property that the buyer intends to purchase, in order to establish its market value. The bank may also initiate legal action in case of a wilful default. In case a home loan borrower fails to pay his EMI for two months, they will have to pay a penalty for the default. However, if the benchmark rate falls to 8% due to market fluctuations, at the same level of spread (25 basis points), the lender will offer the loan at 8.25%. For example if the base rate is 8.25% and the lender sets the spread to 25 basis points, then, the home loan offered will be at 8.50%. Hence, the spread is the difference between the benchmark rate and the rate charged by the bank. The base rate is the rate below which banks are not allowed to lend and they tweak their ‘spread’ to maintain the rate of interest at the same level, despite any change in base rate due to market movements. This means, even if you are paying a monthly EMI, your outstanding loan liability will change, only after a year if the loan agreement has provisions for an annual rest. While there are no charges on pre-paying your home loan if it is a floating rate-based loan, banks do charge a prepayment fee from those borrowers whose loans are on a fixed rate.ĭepending on the ‘rest’ (this could be daily, monthly, quarterly or annual) mentioned in a loan agreement, the bank recalculates the reduction in the principal amount at a definite period. When you pay your home loan before its tenure, this is known as prepayment. A reduction in the repo rate could result in lower home loan rates while an increase will have a corresponding impact on EMI.Ī borrower has to typically arrange 20% of the property value from his own pocket, since banks only lend you 80% of the money. Home loan interest rates are benchmarked against this rate. Repo rate is the rate at which India’s banking regulator, the Reserve bank of India (RBI), lends money to scheduled banks. See also: Fixed vs floating vs semi-fixed home loan However, it is worth mentioning here that fixed rates are not fixed for the whole tenure. If you keep the interest rate fixed for the entire term, changes in monetary policy have little bearing on your payment plan. When the RBI increases rates, the bank would follow suit. If you opt for this, the bank will (it is expected to) change the interest rate on your loan, every time the banking regulator increases/decreases the guidance rate known as the repo rate.
Currently, the interest rate charged by financial institutions varies from sub-7% to over 9% per annum, on home loans. Note that the rates offered to women borrowers are invariably lower than the rate offered to men. See also: Difference between a co-borrower, co-owner, co-signer and co-applicant of a home loanīanks charge an interest on the home loan. While co-applying boosts your chances of getting a bigger loan amount, it also means all applicants are equally tied to this financial obligation. When two or more people apply for a home loan together, they are all known as co-applicants. See also: Factors that affect home loan tenure A borrower can always repay his loan faster and cut short the tenure, to save on interest.
The fixed period for repaying your home loan is known as the loan tenure. See also: Home loan interest rates and EMI in top 15 banks Ensure that you do not default on any of the payments, to avoid penalties and a hit on your credit score. The bank would, in agreement with you, fix a date on which this money would be electronically deducted from your account every month.
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