How to Calculate Interest on Home Loan?

In general, home loans are long-term loans and it is important to figure out your overall interest liability towards the loan in the first place. You can calculate the same using one of the two methods listed below:

1. EMI Calculator: You can calculate the interest amount applicable to your home loan by simply using a home loan EMI calculator. You will be required to fill up the fields provided on the calculator with the following details –
   • Home Loan Amount
   • Loan Repayment Tenure
   • Rate of Interest

   Once the details have been fed, you can click on the ‘Calculate’ button to get a detailed breakup of your loan including the amount payable towards interest.

2. EMI Calculation Formula: Alternatively, you can also use the following formula to calculate your EMI liability for your home loan-
   EMI = [P x r x (1+r)^n]/[(1+r)^n-1]
   Wherein, P is the Principal, r is the rate of interest, and n is number of instalments or loan tenure in months.

Types of Interest Rates in Home Loan

There are mainly two types of home loan interest rates charged by most banks.

1. Fixed Interest Rate:

The rate is constant in this method of calculation throughout the entire loan term. Since the rate is still constant, there won’t be any changes to the interest fees. Depending on the offer, you might be able to change to the floating rate system after the loan tenure has been completed for a specific amount of time.

• Advantage: Since the rate remains fixed, you know how much interest charges you’re paying upfront. Your loan will be shielded from frequent rate fluctuations and will save money in a the long run if there is a hike in lending rates.
• Disadvantage: If the standard lending rates fall, you will not benefit since the interest component remains frozen.

2. Floating Interest Rate:

Your home loan’s interest rate is based on the bank’s current average lending rates. The rate is based on the bank’s most recent stated rate, which in turn is influenced by a number of variables, including adjustments to the RBI’s monetary policy and lending rate as well as the bank’s reaction to the modification.

• Advantage: The most visible perk of opting for the floating rate is that you have the advantage of being billed on the basis of the latest rate. If the rates fall, you save on interest charges.
• Disadvantage: In rare scenarios, if the standard rates go up, the loan has to be bear the brunt of being billed a higher rate.

Note: But, the floating home loan interest rates are cheaper than the fixed home loan interest rates on the first front.

List of Popular Indian Banks/HFCs Offering Best Home Loan Rates

Name of Lender	Interest Rates (% p.a.)
	Up to Rs 30 Lakh	Above Rs 30 Lakh & Up to Rs 75 Lakh	Above Rs 75 Lakh
State Bank of India	8.40-10.15	8.40-10.05	8.40-10.05
HDFC Bank	8.50 onwards	8.50 onwards	8.50 onwards
ICICI Bank	9.00-9.80	9.00-9.95	9.00-10.05
Kotak Mahindra Bank	8.75 onwards	8.75 onwards	8.75 onwards
Punjab National Bank	8.55-10.25	8.50-10.15	8.50-10.15
Bank of Baroda	8.40-10.65	8.40-10.65	8.40-10.90
Union Bank of India	8.40-10.80	8.40-10.95	8.50-10.95
IDFC First Bank	8.85 onwards	8.85 onwards	8.85 onwards
Federal Bank	8.80 onwards	8.80 onwards	8.80 onwards
Bajaj Housing Finance	8.45 onwards	8.45 onwards	8.45 onwards

Step-by-Step Guide to Home Loan Application Process

1. Fill the Loan Application Form & Attach the Documents

The procedure to take Home Loan begins with an application form. This loan application will require a few basic pieces of information about the applicant. Usually, this includes:

• The personal details of the applicant (Name, Phone number, etc.)
• The residential address of the applicant
• The monthly or yearly income of the applicant
• The educational information of the applicant
• The employment details of the applicant
• The property details on which the loan is applied
• The estimated cost of the property
• The present means of financing the home property

Once the formal application is filled, the next step is to attach all the valid documents required by the bank with it. Usually, this includes the:

• Income proof
• Identity (or ID) proof
• Age proof
• Address proof
• Employment details
• Educational proof (school/diploma/degree certificates)
• Bank statements
• Property details on which the loan is applied (if finalized)

2. Pay the Processing Fee

Once the formal application and document submission process is done, the applicant has to pay the processing fee to the bank. This is the amount collected for maintaining the applicant’s loan account. It includes sending some confidential paperwork (like IT certificates, post-dated cheque, etc.) every year.

The processing fee of a bank usually:

• Ranges from 0.25 % to 0.50 % of the requested loan amount.

Say, for example, the applicant has applied for a home loan of Rs. 15 lakh, then the processing fee will be Rs. 3,750 (at 0.25%) and Rs. 7,500 (at 0.50%) respectively.

A commission is then generated by the bank to the agent handling the applicant’s home loan process, which to an extent is taken from the processing fee paid by the applicant. Though most banks have a proper fee structure, it can be negotiated. There is no crime in trying to bargain with the processing fee.

Note. Every bank will have a processing fee for a loan. However, there are banks that offer zero processing fee home loans. Well, don’t fall for this because this advantage can call for a higher rate of interest, stamp duties, and other legal charges.

3. Discussion With the Bank

The applicant must wait until the bank or the relevant financial organization has reviewed the paperwork after completing the application and documentation process. It often takes 1-2 days, or even less if the documentation is submitted correctly.

Before the loan is approved, however, the bank may occasionally request that the applicant attend the bank for a face-to-face meeting. This is done to learn more about the applicant and to determine whether or not he or she will be able to repay the loan plus interest.

4. Valuation of the Documents

Remember that millions of people apply for house loans every day, therefore for the paperwork to be approved as quickly as possible by the bank, the applicant must be completely sincere throughout the entire process.

The bank disapproves of any fraudulent behavior or false documentation. It is illegal and may result in worse problems. The bank authority reviews the application form and supporting documents after they are turned in and the processing fee is paid.

A bank examines the following details of an applicant:

• Residential address (previous and current)
• Place where he/she is employed
• Credentials of the employer
• Workplace contact number
• Residence contact number

Note: A bank representative pays a visit to the applicant’s residence or workplace to verify his/her details. At times, the references listed by the applicant in the form are also checked. This enables a clear trust between both the parties.

5. The Sanction/Approval Process

The approval or sanction stage is one of the most crucial milestones in the home loan procedure. This stage may result in a favorable outcome or an unfavorable outcome. The bank determines everything.

Your chances of being approved decline if any of your documents are rejected by the bank. On the other side, if all goes according to plan, your loan will be sanctioned or accepted extremely quickly.

A bank usually deep-checks the applicant’s following documents to approve a home loan:

• The qualification, age, and experience details.
• The transactions made with the applicant’s bank.
• The monthly and yearly income.
• The current employer and the type of job he/she pursues.
• The nature of the business (applicable only for a self-employed).
• The ability to repay the loan amount with the set interest rate.

Based on the information mentioned above, the bank finalizes and communicates the maximum loan amount the applicant can receive. Finally, this proceeds with an official sanction letter. It can be either unconditional or can contain a few policies, which has to be fulfilled by the applicant before the disbursal.

6. Processing the Offer Letter

As soon as the loan is sanctioned or approved, the bank then sends a certified offer letter, which mentions the following details:

• The loan amount that is being sanctioned.
• The interest rate on the total loan amount.
• Whether the interest rate is variable or fixed.
• The loan’s tenure details.
• The mode of loan repayments.
• Terms, policies, and conditions of the home loan.

The Acceptance Copy

After accepting the offer letter, the applicant must sign a duplicate copy of the letter for the bank’s records. This used to be accompanied by a specific administrative cost in the past. Nevertheless, it is no longer used.

Note: Be sure to carefully read all of the information. Verify that the interest rate is being applied at the agreed-upon percentage with the bank. Keep in mind that you can negotiate the interest rate on the mortgage. Always give it a shot and take advantage of this as the best.

7. Processing the Property Papers Followed By A Legal Check

The bank then focuses on the house property the applicant plans to buy after the offer letter has been formally accepted by the applicant. Even though it hasn’t been decided, the applicant can ask for a period of time to make their choice.

Once the property is selected, the applicant has to:

• Submit all the original property documents to the bank. It remains with them until the loan is repaid. Also, this serves as the security towards the home loan the applicant has applied for.

The original property papers will normally include the following details:

• The name of the seller.
• The identification and address proofs of the seller.
• The name of the property.
• The address of the property.
• The chain of written documents if the seller isn’t the primary or actual owner.
• NOC (No Objection Certificate) from the primary legal owner (if any).
• NOC from the statutory development board representative & cooperative housing society.
• If the land is already on a lease, the bank will require a NOC from the lessor as well.

Note: The original property papers stay with the bank until the home loan is completely repaid.

Legal Check

The bank authenticates the property papers after they have been submitted. We refer to this procedure as a “legal check.” The sale documents between the applicant and the seller have been confirmed.

The bank’s attorney receives these original papers for a thorough review. Everything pertaining to a mortgage loan is only in order if the attorney has approved all of the provided documents as being clear. If not, additional documentation will need to be provided by the applicant for verification.

8. Processing A Technical Check & The Site Estimation

Every bank exercises extreme caution when approving loans and financing residential real estate. As a result, a technical check or double check is performed. A property expert is sent by the bank to inspect the applicant’s intended purchase of real estate.

Now, this person could either be an employee of the bank or a civil engineer or someone from an architect’s firm.

The visit to the “site property” is basically conducted for verifying the details given below:

• The stage in which the construction is.
• Quality of the construction.
• Work progression.
• The time required to build the house.
• The layout of the house and whether the governing authority has permitted it or not.
• If the builder has valid requisite certificates for construction on the land.
• Property valuation and the environmental areas.

If the construction is already for resale or in a ready stage, then the representative will check for:

• The building’s age.
• The internal or external property maintenance.
• The loan tenure and if the building falls within the applicant’s loan eligibility criteria.
• The quality of the construction.
• The surrounding area.
• The valid requisite certificates to hand over the flat/house’s possession to the buyer.
• The existing mortgage on the home property.
• The property valuation.
• The building’s approval plans, following the government laws, etc.

Note: A bank conducts a proper technical check to understand the construction progress and to gain the trust of the applicant. This is an important phase of the home loan process and hence, cannot be skipped by the applicant.

Also bear in mind that there will be a fee for this technical check, which may be either charged separately or might be taken from the upfront fee.

The Site’s Value Estimation

The expert will determine and assess the property’s total value after completing the site’s technical inspection. The main reason for doing this is the rise of malpractice. There have been numerous instances where applicants have presented property purchases from connected entities at wildly inflated prices in order to obtain low-cost loans.

As a result, it is now quite risky for a bank to lend money to one of its applicants. To make the sanction process simple, a site’s estimation might assist the bank in figuring out the overall loan amount.

Note: A few banks charge an extra fee for the estimation check as well. It is covered either by the upfront amount or the applicant might be asked to pay separately.

9. The Final Loan Deal

The final registration of the contract comes when the bank completes the technical and site evaluation and the lawyer completes all the documentation. The loan agreements are finalized, drafted, and stamped in addition to being signed by the bank’s attorney.

10. Signing The Loan Agreement

The applicant must sign the loan agreement once all of the paperwork is in order. For the first 36 months or for the period that both parties have agreed upon, he or she must submit the postdated checks.

The original property documents must then be delivered to the bank. Some banks will even record the applicant delivering these documents to the bank on camera. This serves as verification, security, and safety for the bank.

The MOE (Memorandum of Execution) step carries a stamp duty that depends on the state where the applicant applies. The applicant is obligated to pay this tax.

11. The Loan Disbursal

The applicant signs the paperwork, and once everything is in order legally, a check for the loan amount is issued. A few important documents that will serve as the applicant’s personal contribution to the house property must first be submitted to the bank.

If the application is attempting to obtain additional funding from a third party, supporting documentation must also be provided. The bank doesn’t disclose the loan’s partial disbursement until then. The buyer, development/society authority, or builder are always listed as the payees on the check.

Nevertheless, there can be a few exceptional cases too. Say, for instance, the applicant has made excess payment from his/her own account, then the cheque is handed to him/her directly from the bank.

Note: Make sure not to delay the house loan process after approval because every day counts here. The moment the loan is sanctioned, the interest rates are charged from that day onwards. So, every single day costs! Hence, ensure that the cheque is taken on the mentioned delivery date. Avoid paying additional interests.

Key Points To Remember

• Research for the banks offering the cheapest home loans.
• Read the bank’s eligibility criteria carefully before entering the procedure to take home loan.
• Keep all the ID proofs, address proofs, employment proofs, and other details handy.
• Do not fake any of the documents, as this will only call for serious troubles.
• During the face-to-face meeting with the bank representative, ensure to carry the original documents.
• Just because the applicant is eligible for a home loan, it doesn’t mean he/she can borrow a higher sum.
• The interest rates are negotiable. So, always use this opportunity for the best.
• There is a separate fee for processing the loan, reality check, site estimation, and other administrative works.
• Do not skip any stage during the valuation and verification process.
• Read every loan document carefully before signing.
• Once the loan is sanctioned, the original property papers are handed over to the bank and remain with them until the loan is completely repaid.
• It usually takes about two weeks to complete the process of home loan, provided that the documents submitted by the applicant are valid.

FAQs

Q1. Which is the best bank to get a home loan?

Ans. For most, the best bank for availing a home loan would be the one that offers the lowest home loan interest rates. However, besides the interest rates, factors such as the repayment period, LTV ratio, loan amount, processing fees and time taken for loan approval and disbursal must also be considered while searching the best home loan offer. To make your search easier, visit online financial marketplaces like Paisabazaar.com to check and compare home loan interest rates along with tenure, processing fees and other associated costs from various banks and HFCs

Q2. How to check the total interest cost for your home loan?

Ans. Home loan applicants can use home loan EMI calculator to calculate the total interest cost of his home loan. They would need three data points – required loan amount, loan tenure and interest rate for using Home Loan EMI calculators.

Q3. Which lender offers the cheapest home loans in India?

Ans. Currently, SBI, Bank of Baroda and Union Bank of India are offering the lowest interest rate on home loans starting from 8.40% p.a., followed by UCO Bank and Bajaj Housing Finance offering housing loans at 8.45% p.a. onwards. Next, Punjab and Sind Bank, Bank of Maharashtra, LIC Housing Finance, PNB Housing Finance, HDFC Bank, Punjab National Bank and Bank of India offer home loans at one of the lowest rates starting at 8.50% p.a.

Q4. What Is Full Disbursement?

Ans. A loan is disbursed based on the construction stage of the house property. In the case of ready/resale, the loan disbursement is full, meaning that the bank delivers full or complete payments to the recipient via cheque.

Q5. How much is the processing time for a home loan?

Ans. The processing time for a home loan varies from bank to bank and depends on multiple other factors like the lending procedure of the institution, verification process, etc. In most cases, the processing time is between a few weeks to a month.

Q6. Which bank has lowest home loan interest rate?

Ans. Though interest rates offered by banks can increase or decrease as per the banks’ discretion, right now the Bank of Maharashtra is offering the lowest home loan interest of 8.40% p.a. to its customers. However, note that this rate is applicable only on home loan for women applicants.

Q7. How to Get Lowest Home Loan Rates in India?

Ans. Home loan interest rates are at a 15-year low, so almost all the banks are offering lower interest rates on home loans compared to what they were offering in the previous financial year. However, to get the lowest home loan interest rates, compare rates offered by lenders. Always use a home loan EMI calculator while comparing rates; it will help you estimate how much you have to pay every month against your loan.

Q8. How to reduce home loan interest?

Ans. Choose a shorter tenure – For long term loans, though the EMI is less, the overall cost of the loan drastically increases because you are paying interest for a longer period of time. So, choose shorter tenures as the interest amount will get much lower with time. Use a home loan EMI calculator while comparing long-term and short-term home loans.

Q9. How can I check total interest payout for my housing loan?

Ans. Use a home loan EMI calculator to check your total interest payout against your loan. Just enter the loan amount, tenure, and interest rate. Upon calculation, you will not only be able to check your EMI, but also a detailed break-up of your repayment schedule through an amortisation table. Through the amortisation table representing your repayment schedule, you can check how much interest you have paid against your loan.

Q10. Which bank has the lowest rate of interest for the self-employed?

Ans. Bank of India and SBI are the banks that are offering attractive interest rates for self-employed professionals and non-professionals, with the rates starting at 6.85% p.a. and 8.05% p.a. respectively.

Also Read: Joint application in home loan requirements pros and cons

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