When it comes to a housing loan, one of the key terms you must comprehend is ROI, or Rate of Interest. ROI determines the amount you spend on your house loan over a period and also has a direct bearing on your EMI payment and repayment in the long run. If you're considering availing a housing loan, understanding what is ROI and how you can calculate it will save you a lot of money in the long run.
What is ROI?
ROI is short for Rate of Interest. When it comes to loans, especially housing loans, ROI refers to the rate at which lenders charge over the principal amount of the loan. Your interest outgo and, eventually, the cost of borrowing are decided by the ROI.
Simply put, if you borrow ₹10 lakh with an ROI of 11% per annum, you will be paying 11% interest on the loan outstanding annually until the loan is completely paid back. This brings the concept of ROI at the forefront of the affordability and planning of your home buy.
What is ROI in a Home Loan?
When we talk specifically about home loans, the ROI represents the annual interest you will pay on the borrowed amount. This rate can be fixed or floating, depending on the loan agreement.
A fixed ROI stays the same throughout the loan term, whereas a floating ROI is different depending on the lender's benchmark rates and market conditions. Both have advantages and disadvantages, but a floating ROI tends to begin slightly lower and can vary over time.
Grihum Housing Finance provides home loans with an ROI of 11% onwards. The applicable rate actually varies according to the income level of the applicant, his/her repayment capacity, purpose of loan (construction, extension, or improvement), and loan term.
Also Read: How to reduce your home loan interest
Why is Understanding ROI Important?
Whether it is a first home or an investment in a second home, ROI must be understood because:
- It decides your EMI per month.
- It impacts your overall interest expense within the loan period.
- A slight difference in ROI can cause a great variation in overall payment.
By comparing ROIs available and computing possible repayments, borrowers can make wiser monetary choices and choose a mortgage that fits their long-term budget.
How to Calculate Home Loan ROI
To know how much you will be paying throughout your loan period, you must determine the Equated Monthly Instalment (EMI), which includes ROI. The formula used for calculating EMI is as follows:
EMI = [P x R x (1+R)^N] / [(1+R)^N − 1]
Where:
- P is the principal loan amount
- R is the monthly ROI (annual ROI divided by 12 and converted to a decimal)
- N is the loan tenure in months
For example, for a loan of ₹5 lakh at 11% ROI over 20 years:
- P = 500000
- R = 11% / 12 / 100 = 0.00917
- N = 240 months
Using the formula, you can approximate your EMI and total repayment for the whole duration.
Several lenders, such as Grihum Housing Finance, offer EMI calculators on their websites so that applicants can visualize their repayment schedule at varying ROIs.
Factors That Affect Home Loan ROI
Various elements can determine the home loan ROI you're eligible for:
- Credit score: A better credit score can help you get a lower ROI.
- Income level: Steady and better incomes tend to make lenders confident of repayment potential.
- Loan amount and term: Bigger amounts or longer repayment periods could attract other ROI slabs.
- Property type: Ready possession homes, under-construction units, or renovation loans could have different ROI brackets.
At Grihum Housing Finance, housing loans are customized to cater to informal income segments too, enabling home ownership without overly strict documentation.
Fixed vs Floating ROI in Housing Loans
It is very important to understand the distinction between fixed and floating ROI:
- Fixed ROI: Not influenced by market fluctuations, suitable for people who like fixed repayments.
- Floating ROI: Relating to a benchmark rate and is variable to rise or fall over the loan period. It can lead to saving in case of a fall in market rates.
Grihum Housing Finance generally offers floating ROI plans from 11%, which enables customers to enjoy supportive market fluctuations when due.
Also Read: Floating vs Fixed Interest Rate: Which is Better?
How Grihum Housing Finance Structures ROI
Grihum Housing Finance considers every application as a whole, providing loans with ROI from 11% based on major factors such as proof of income, informal proof of income, property type, and loan purpose (home buying, home construction, or home improvement).
This inclusive framework provides greater accessibility, particularly for self-employed, homemakers, and those without conventional income proof.
Ways to Get a Better ROI
Though certain house loan ROI elements cannot be negotiated, borrowers can enhance their prospects for a more favourable rate by:
- Having a good credit report
- Prepaying outstanding loans
- Paying a larger down payment
- Taking shorter loan terms if possible
Meeting with your lender will also assist you in knowing whether you are eligible for any scheme-based incentives or winter season rate discounts.
ROI and Its Long-Term Impact
Even a small difference in the rate of interest can lead to a significant change in the total repayment throughout a housing loan. For instance:
- A ₹5,00,000 loan at an ROI of 11% for 20 years would result in a total interest payment of approximately ₹7.39 lakh.
- The same loan at an ROI of 10.5% would lead to a total interest payment of around ₹6.98 lakh.
That’s a difference of over ₹40,000 just by a 0.5% variation in ROI. This demonstrates why understanding home loan ROI is so essential when choosing your lender, loan amount, and tenure.
Conclusion
Understanding what is ROI in a home loan is not just a matter of knowing the percentage. It's a matter of understanding how even a small difference makes a difference to your financial commitment in the long run. Whether you're shopping around for lenders or budgeting, including home loan ROI in your calculations gives you the most informed choice.
Grihum Housing Finance, with its 11% ROI kicking in, provides inclusive and affordable home loan products specifically designed for diverse income segments. By keeping a check on your loan composition and estimating the actual cost of borrowing, you can step closer to safe and affordable homeownership.
