Real estate is one of the few sectors that has constantly delivered stellar returns. Unfortunately, this also means that property prices have increased continually over the last few decades, rendering homes almost unaffordable for the middle-class. Home loans make homes affordable. They allow homebuyers to buy a property in the present, before its prices increase further, and pay for it over the years in the form of EMIs. Borrowers can play around with the loan amount and the loan tenor to ensure their EMIs remain affordable.
The affordability of a home loan is directly linked with the interest rates offered to a borrower. A low interest rate helps keep both the EMIs as well as the interest payout in check. On the other hand, when a borrower settles for a high interest rate loan, they run the risk of making their EMIs unaffordable and the home loan too expensive. The question is how do banks decide the home loan interest rate to be offered to a potential home loan borrower?
Lenders decide the home loan interest rate to be offered to a borrower based on several different factors, such as the borrower’s credit profile and CIBIL score, their debt-to-income ratio, age and income, etc. One of the other key factors that affects home loan interest rates is the prime lending rate or PLR. In this article, we run our readers through the basic idea of PLR and how the PLR affects their home loan interest rates.
What is Prime Lending Rate?
In 2003, the Reserve Bank of India came up with the concept of Prime Lending Rate or PLR. The Prime Lending Rate is a reference rate that helps banks and commercial lenders decide their lending rates. This rate is decided by the board of directors of a bank or lender and is revised periodically. The members of the board generally take into account factors, such as external market conditions and cost of funds while deciding their PLR or Prime Lending Rate. The PLR also depends directly on the policy rates of the Reserve Bank of India. Everytime the Reserve Bank of India changes its policy rates, banks and commercial lenders revise their Prime Lending Rates too.
In conclusion and in very simple words, Prime Lending Rate or PLR is the rate at which a bank or a commercial lender lends money to its best, most creditworthy clients.
How Does the Prime Lending Rate affect Home Loan Borrowers?
Home loan borrowers must develop a key understanding of how PLR works because it has a direct impact on their home loan interest rates. Every time the Reserve Bank of India increases the Repo Rate, banks and commercial lenders increase the PLR, which in turn, leads to home loans becoming expensive. On the other hand, when the Reserve Bank of India decreases the Repo Rate, the PLR usually goes down too and home loans become cheaper. Thus, if you have opted for a Repo-rate linked home loan or a floating interest rate housing loan, you must keep an eye on changes in the PLR.
What are the Factors that affect the Prime Lending Rate?
As mentioned before, the board of directors decide a banks or lender’s Prime Lending Rate or PLR. Their decision takes into account several different factors. Let us take a look at the factors that affect the Prime Lending Rate.
- External Factors: We discussed before in this article how the country’s central bank’s lending rate or the Repo rate, which is the rate at which the Reserve Bank of India, lends money to borrowers affects home loan interest rates. However, apart from the Repo rate, other external factors, such as the economic growth and inflationary pressures at play within the economy as well as the prevailing market conditions also affect the PLR.
- Internal Factors: The Board of Directors also carefully assess internal factors, such as administrative expenses, cost of funds and their target profit margin while deciding their Prime Lending Rate. Any changes in any of these internal factors also directly impact the Prime Lending Rate.
- Base Rate: The base rate is the lowest rate at which a lender can lend money to a borrower. Any changes in the base rate also has a direct impact on the Prime lending rate.
Final Words
If you are planning to avail of a home loan, you must start reading about it and the various factors that will impact your chances of getting approved for one as well as the interest rate you will pay on your home loan now. A home loan is a long-term commitment that will very easily last 15 to 20 years. Further, since home loans are big-ticket loans, the home loan EMIs often end up consuming a chunky part of one’s monthly income. Borrowers must, therefore, try their best to negotiate for the lowest home loan interest rates possible and they must also develop a thorough understanding of the factors that affect their housing loan interest rate. The PLR directly impacts the interest rate that a borrower is paying on their loan and therefore, all home loan borrowers must have a very clear understanding of the various factors that affect the PLR.
