A housing loan is a type of loan that people opt for when they want to purchase a house. in this type of loan, the funds are disbursed to the property developer or reseller in return for the change of ownership to the borrower or borrowers in case of a joint application.
In return for the funds disbursed, lenders typically charge a fee called interest which is charged on the outstanding amount of principal or whatever principal remains unpaid. There are different modes in which this interest is charged:
Fixed rate of interest: The fixed rate of interest on housing loans means that interest will be charged at a fixed rate for the entire duration of the loan unless the rate is revised by the lender. If the rate of interest changes, then the lender resets the rate on the loan. This is more specifically done for loans where the current rate is higher than the rate charged on the loan. However, these resets are not done immediately as and when the rates are changed.
Floating rate of interest: In case of a floating rate of interest, the rate of interest varies depending on the base rate of the bank. In case the rate gets revised, the rate on the loan is revised immediately.
Hybrid loans: In case of hybrid loans, the rate of interest is fixed for a certain period of time and then floating for some period of time.
However, recently, banks have introduced home loan with rate of interest linked to the repo rate maintained by the Central Bank. This means the borrower has an option to choose a rate of interest linked to the Repo Linked Lending Rate (RLLR) of the Reserve Bank of India as compared to opting for interest based on the Marginal Cost of Lending (MCLR) maintained by the bank. There are very few lenders offering this type of loan presently.
The benefit of opting for this type of loan is the increased transparency. In case of any repo rate cuts, the benefit is immediately passed on to the borrowers in the form of a decrease in the home loan interest rate. Similarly, in case of any upward revision in the repo rate, the home loan interest rate will increase.
The reason for a shift to this type of interest rate for the loan was that banks were not found to be passing on the benefits of a cut in the repo rate to their customers. To change this situation, the Reserve Bank directed banks to shift to an external benchmark and not the MCLR.
The conditions for each lender offering such a product are different. The rate of interest may not be the same for each loan application since the interest rates are dependent on other factors that affect the eligibility of the borrower such as monthly income, profession etc.
However, overall, this scheme provides benefits to the borrowers since they have a transparent system through which they can easily find out the rate of interest on their loans.
All About Bank And Loans in India 