Misconceptions and Reality of Home Loan Interest Rates

9 Apr

It’s not a hidden fact that home loan interest rates can put a person in dilemma whether to keep a mortgage in stock or not. The potential borrowers decipher their own reasons behind the fluctuations in the rates applied on home loans, and end up buying a mortgage without foreseeing how it might respond in the near future post borrowing. People have their own conjectures as to why the rate will vary, but very few have the proper idea based on solid facts.

So what are these common delusions that evoke the evil to the mind?

  • The Central Banking Institution, RBI is in charge of increasing or decreasing home loan interest rates.
  • Home loans provided by HDFC bank and HDFC Ltd are on the same basis.
  • There’s nothing cheaper than State Bank of India. They always offer a reduced rate.
  • International banks charge high interest rates and finance only those who have immense account balance with them.
  • Only banks are the lenders. No one else!
  • The rates are ever increasing. There is no scope of negotiation with the lender.

What’s the real thing behind this fluctuation?

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There are few vital components separated from financial strategies that administer the development of interest rates. Prospective borrowers need to keep an eye on these to get a concept on the conceivable development of interest rates. There are a few components that solidify or slacken the income or expense of cash for the banks. At the point when banks are under stiff condition, they expand the rate. Due to which, the rate goes up for the borrower. Taking after are few cases where banks need to promise money or security to the RBI; which influences their income and have an effect on the premium rates they provide:

Overnight Rate: The rate charged intra-bank for fulfilling RBI requisites. With corresponding variation, the interest rates are slackened or stiffened by the banks.

SLR: This is known as the Statutory Lending ratio. It’s an obligation that a bank has to follow by maintenance in form of bonds, prior to sanctioning loan to the client.

Repo rate: In case there is not much funds in a bank, they apply the repo rate to borrow at the expense of Govt. Bonds as a security from RBI.

Reverse Repo rate: In this case, banks have funds in excess and are entitled for interest payment on the same.

Cash reserve ratio: A threshold amount i.e. some part of the customer’s deposit which a bank has to keep in reserve with the RBI.

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