Owning a house, either purchasing or building it, comes at top in the wishlist for most Indians. Having said that, it is a gigantic financial investment. The skyrocketing prices of property or houses in India are no less than a challenge. Considering that, the government regularly revises policies that influence home loans and mortgage interest rates to meet the challenging needs of home buyers and the dynamic nature of the real estate sector.
That is probably one of the reasons why home loans qualify for multiple tax benefits under the Income Tax Act of India. Let us understand the types of home loan interest rates prevalent in India before analysing the impact of various regulations on them.
Type Of Interest Rates
Financial institutions offer two types of interest rates: floating and fixed.
While the floating rate keeps fluctuating with changing base rates, the fixed rates remain unchanged throughout the loan’s term. Generally, floating rates are 1%-1.25% lower than fixed rates, but any revision in the floating rate will only affect the loan term and not the instalment amount.
On that account, a fixed rate is an ideal choice if a borrower likes certainty regarding the repayment period. On the other hand, the floating rate lets borrowers enjoy benefits such as a reduction in base rate and lower interest charges initially.
You can use an online home loan interest calculator to determine which type of interest rate is more suitable for you. Now, let us dive into some significant government reforms and regulations and their influence on home loan interest rates in India.
Impact Of Significant Government Reforms And Regulations On Home Loan Rates
The Government of India and the Reserve Bank of India (RBI) are working together to make Home Loans more affordable and trustworthy for borrowers. Let us review some recent yet significant reforms, policies and regulations and analyse how they impact interest rates.
RBI’s Monetary Policies
Home loan owners directly feel the effect of changes in RBI’s monetary policies. Home loan interest rates drop when the Cash Reserve Ratio (CRR) or Repo rate falls because banks will have access to funds at cheaper rates.
The interest rate on loans will therefore be lower for borrowers. Conversely, the interest rate increases with an increase in the Cash Reserve Ratio (CRR) or Repo rate. This makes it more expensive for borrowers to repay their debt.
Goods And Service Tax (GST)
All real estate investors are required to pay GST, regardless of whether one is buying a house on loan or with personal savings. Earlier, one had to pay a 15% service tax when taking a Home Loan, which was later revised to an 18% GST after the new tax regime was introduced in July 2017.
However, since April 2019, the Government of India has significantly cut the rates even further to 12% for ready-to-move-in properties and 5% for under-construction properties. These lowered rates have made home loans more affordable to new property buyers.
Prepayment Charges
Home loans can go up to Rs 1 crore or more with a maximum term of 30 years. Borrowers can save money by paying their debt partially or in full before the term is up. This could be possible if the borrower receives some extra funds for any reason (profit in business or salary hike).
Also Read: Eco-Friendly Homes: The Future of Sustainable Living in India
To help borrowers pay back their home loans quickly, the Reserve Bank of India has recently abolished the prepayment fees on home loans with floating rates and slashed the penalty to 3% in case of fixed interest rates. Earlier, a prepayment penalty of 5% of the loan balance was levied on the borrower.
Home Loan Transfer And Foreclosure
RBI has recently waived off foreclosure charges to help borrowers refinance their home loans. They can now transfer their current home loan to another bank without any hassle to avail a lower interest rate.
The borrower will not have to pay the foreclosure charges when they close their loan with the current bank. This reform, however, only applies to loans with flexible interest rates.
Conclusion
Some banks may offer easy loans at a lower interest rate than that prevalent in the market, while some can levy hefty processing fees. Considering everything, people should thoroughly research every detail, including government policies and regulations, to maximise the benefits of their Home Loans and become proud homeowners.
