14 JANUARY, 2022

One of the most important aspects that borrowers look at while applying for a home loan is its interest rate. This is because even a slight change in the home loan rate can have a significant amount of difference on the EMIs. Now, both salaried as well as self-employed individuals can apply for home loan plans. However, the interest rates offered to self-employed individuals are likely to be slightly higher.

It is natural to be intrigued about why the interest rates differ even though both salaried and self-employed individuals are earning. Now, there are quite a few reasons for this difference. Let’s take a look at them.

1. Self-employed individuals have more flexibility in reporting their incomes

Salaried individuals have no option but to showcase their income as is. This is because salaried individuals receive salary slips from their employers, which state the amount against each of their salary components. These include house rent allowance (HRA), performance bonus, basic salary, dearness allowance, conveyance allowance, leave travel allowance (LTA), medical allowance, and other allowances. Now, self-employed individuals have much more flexibility as compared to this. They can alter their income to ease their tax burden. For instance, they can show a higher turnover and report lower net and gross incomes. Now, this can increase the credit risk for the lender. This is another reason why self-employed individuals are generally charged higher home loan interest rates.

2. They do not have a steady monthly income

Salaried professionals have full-time employment contracts with organisations. This makes it possible for them to have a record of monthly income. Even if they lose their job, they can apply for a new one and start repaying the debt. However, it is not the same for self-employed individuals, as they do not have a steady flow of income. Businesses are volatile, and hence the earnings from a business may not always be regular. There are specific businesses that earn a majority of their income only during a specific period of the year and have to wait for the next one, until which their income stays low. Since this creates uncertainty, thereby increasing the lending risk, self-employed individuals are charged with a higher interest rate for a housing loan.

3. Frequent business transactions can prove to be a credit risk for the lender

While applying for a home loan, both salaried and self-employed applicants are required to submit bank documents. This is so that their transactions can be reviewed while determining the housing loan interest rate. Now, self-employed individuals are usually current account holders since savings accounts are for maintaining funds. Current accounts are meant for frequent business transactions, which are essential for self-employed professionals. It is quite possible that the account does not have enough funds on the date of the EMI payment due to a big business transaction or a cash crunch. This proves to be a higher credit risk for the lender, which is why self-employed individuals are charged a slightly higher interest rate as compared to salaried individuals.

You can make use of Kotak Mahindra Bank’s home loan EMI calculator to find out about the loan’s monthly instalments. This will help in understanding whether the home loan rate being offered is an affordable option.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.