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05 MAY, 2021
There’s no denying that a home loan can help you purchase your dream home, but before taking this huge financial decision there are several factors that must be taken into consideration. Right from checking the lender’s credibility and borrowing the right loan amount to comparing the home loan interest rates, you must conduct thorough research before availing a home loan. Since a home loan is a long-term financial commitment, ensure to settle for a lender that offers a competitive interest rate. This is because even a slight reduction in the home loan interest rate can decrease the overall cost of the loan and help you save money too.
There are several factors that lenders consider when deciding the interest rate of your home loan. Being aware of those factors can help you get the best deal. Here are few factors that influence home loan interest rate.
The first and foremost thing that significantly affects the home loan interest rate is the credit score. The credit score ranges between 300 and 900 and it reflects your creditworthiness. It is based on your credit and repayment history, credit mix, credit utilization ratio, and other factors. Lenders usually check the credit score of borrowers when assessing their home loan application. If you have a high credit score of 750 or above, it improves your home loan eligibility. Moreover, lenders may consider you a low-risk applicant and offer an attractive interest rate on the home loan. Thus, before applying for a housing loan, it is advisable to work towards improving the credit score.
The higher the loan amount, the higher will be the interest charged on the home loan. Therefore, in case you have enough savings, try to pay a high amount as down-payment while purchasing a house. This will not only reduce the repayment burden but also help you avail the loan at a competitive rate.
The Loan-to-Value (LTV) ratio compares the loan amount you are hoping to borrow against the appraised value of the property you wish to purchase. With reputed lenders, it’s possible to avail up to 90% of the property’s value as home loan. However, the higher the LTV ratio, the higher will be the home loan interest rate. Thus, try to make a higher down payment and avail a lower home loan amount. This will not only reduce the repayment burden but also allow you to avail home loan at a comparatively lower interest rate.
Lenders may check your employment history before deciding on the home loan interest rate. If you have a stable job and a steady source of income, there are good chances of getting a home loan at a relatively lower interest rate. For instance, salaried professionals with reputed organisations or PSU and government employees could get a better rate or terms due to their job stability.
Type of Interest Rate
Home loan interest rates are primarily of three types — fixed, floating, and mixed interest rates. Fixed rate remains constant throughout the loan tenure, whereas floating interest rate may fluctuate depending upon the market volatility. In the case of mixed-rate, the interest remains fixed for a specified duration, and then it changes to floating rate. Since fixed and mixed rates have a higher risk associated with them, lenders usually charge a high interest on such loans.
If the property you wish to purchase is in a good locality and has a high resale value, lenders are more likely to charge a relatively lower interest rate. On the other hand, for homes with a lower resale value, the interest charged on the loan may be comparatively higher.
The Marginal Cost of Funds based Lending Rate (MCLR) is the minimum interest rate set by the RBI below which lenders cannot offer loans to the borrowers. MCLR works as an internal benchmark or reference rate for the lenders, and hence it plays an important role in deciding the home loan interest rate. A lower MCLR will mean a lower interest rate, and consequently lower repayment burden.
Being aware of these factors when checking on home loan interest rate will help you choose the right lender and save on money too. It’s advisable to research on home loan interest rate and check on the lender’s credibility to make your home buying journey an easy and affordable one.
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