How Home Loan Interest Rates Change In India And How They Impact You

Continuous changes are taking place in the financial world. But in several of the situations there is not adequate understanding about the manner in which the changes will actually affect an individual's finances. This is why it becomes important for an individual to read the fine print to understand the exact implications of the changes. In the housing loan area, changes are taking place in the loan rate at specific time intervals. Let us take a look at the manner in which this will impact individual borrowers.

Actual rate that has changed

A vital area to consider is the actual rate that is changed by a housing finance company or bank. For an individual home loan taker, there are a couple of rates that are actually important as these determine the final impact. The first is the rate applicable to the new loans, which can vary according to some special scheme being offered in the market at that time. The second is the prime lending rate to which floating rate home loans are actually linked. This rate is also known by names like the benchmark prime lending rate.

There is a large difference that will arise due to the impact of a change in these two rates. A change in the former will be beneficial only to the new home loan borrowers because they will get a loan at a lower interest rate. However, if the latter rate is changed the existing borrowers will also benefit because it will bring their floating loan rates down. So, you have to match your specific position with the rate changes to determine whether the change will be beneficial for you.

The extent of a change in the rate is the main factor that will impact you as a borrower. Once it is known that the change of the rate is applicable to you then the extent of the change becomes important. If the change is large then there is a bigger benefit in terms of a reduction in the rate as compared to small changes. For example, if you have a loan of Rs 10 lakh outstanding where the interest rate is 11 per cent and the equated monthly installment (EMI) is Rs 12,300 then this loan would have a remaining period of 150 months. If the rate drops to 10.75 per cent then the outstanding time would come down by 4 months. On the other hand, a further drop to 10.25 per cent will reduce the EMI by 11 months. The extent of change is important in both situations of a rising and falling rate because of the impact it will have.

The frequency at which a bank changes its benchmark rate should also be taken into account by the borrowers because this determines the extent of a benefit or hit that will be passed on to them. For example, if a bank changes the applicable home loan rates at specific time periods then this becomes a determinant as to when the next rate change will probably be made by the bank. It also brings in an element of certainty about the time at which the lenders will actually behave. On the other hand, some banks might change the details without any schedule. However, during extraordinary situations most institutions will make changes that might not follow the normal path.

Applicability of change for a borrower

This is probably the crucial point that has to be considered by you because this determines when the benefit will actually flow down to you. Home Loan conditions state the time interval when the rate change is applicable for existing borrowers if there is one. So if the change has to take place on a quarterly basis then the individual will have to wait till the time comes in the next quarter for him/her to actually witness the benefit or the hit in case of a higher rate. This could mean that a change made in the month of April is available in the form of a lower rate of interest only in the month of July because that is when the next reset of the rates will take place. The shorter the time period at which the reset of the rates is done the better it is for the borrower because the change is translated quickly and he/she is able to ensure that the impact is witnessed accordingly.