While a home loan can help you achieve your dream of owning a home, it is prudent to apply for one that won’t burden you disproportionately. Keeping this in mind will help you make the right decision, especially because repaying the home loan is a task that demands financial commitment. To determine which lender’s interest rate suits you best, we recommend using a home loan EMI calculator.
The home loan interest rate is a primary component of the terms and conditions of any home loan. A reasonable rate of interest makes the prospect of seeking a home loan less challenging. Some other factors influencing the type of home loan offer made to you include the current state of the economy, the inflation rate, and your financial standing. In this article, however, our focus remains on the home loan interest rate and the seven important factors that affect your home loan rate of interest.
What Are the Types of Home Loan Interest Rate?
Here is a brief explanation of the different types of home loan interest rates available in the loans market.
- Fixed Interest Rate
A fixed home loan interest rate is the type that remains uninfluenced by the country’s evolving economic condition. It means that no matter how the economy is performing, the rates of interest applicable on your home loan remain unchanged. A significant drawback of the fixed interest rate is that it is higher to stay above the economic shifts. Additionally, in some cases, individual borrowers are sometimes even charged a prepayment penalty in the advent of a foreclosure.
- Floating Interest Rate
The floating interest rate is sensitive to the current economic situation. While on some days, there may be increments on the home loan interest rate, on others, you could enjoy lower interest on your home loan. The most notable advantage of the floating interest rate is that the borrowers benefit from repo rate cuts and positive policy changes. Individual borrowers may also be able to prepay their loans without any penalties.
Factors That Affect Your Home Loan Interest Rate
Several factors affect the rate of interest that you are offered on your home loan. We’ve listed seven such components.
- Internal and External Benchmarks
Most lenders offer borrowers two home loan interest rate types to choose from – one is linked to an external benchmark and the other is linked to an internal benchmark. Depending on what the borrower chooses, the parameters for the interest rates change.
Borrowers who choose to avail of a loan that is subjected to the internal benchmark, depend on the lender’s MCLR. It is decided by their operating costs, the marginal cost of funds, any negative carry-ons, and the loan tenor premium. The MCLR undergoes a periodic reset, allowing lenders to evaluate the rate for their current borrowers. This process decides whether your home loan interest rate will increase or fall.
In the case of interest rates that depend on other factors, the deciding variable is the RBI’s repo rate. For such loans, the interest rate is determined by the repo rate set by the RBI. If the repo rate is low, then lenders may pass on the benefit to borrowers. Similarly, if the repo rate is high, then the interest rates offered are steeper.
- Interest Type
The type of interest rate you agree to also decide the type of home loan offer you may get from your lender. A fixed-rate of interest eliminates the possibilities of interest rate fluctuations but stops you from enjoying low-interest rates when the floating interest rates are favourable. Your choice of interest rates should depend on the current economic scenario.
- Credit Score
The credit score is a summary of your repayment history, your creditworthiness, and your level of fiscal discipline. A high score increases your chances of being eligible for a low home loan interest rate. You must be aware of how to improve CIBIL score get a home loan at the lowest interest rate.
- Loan to Value (LTV) Ratio
The LTV ratio is a metric for financial institutions to assess the risks involved in lending money to borrowers. The LTV is calculated by checking the amount you apply for against the value of your assets. To determine the LTV ratio for home loans, financial institutions weigh the loan amount you’ve applied for against your asset value.
For instance, if your loan application is for an amount that equals half of your asset, then your LTV ratio is 50%. Amongst other things, a high LTV ratio may impact your chances of getting a low-interest home loan.
- Property Location
If your property is in a popular locality, equipped with all the necessary amenities, you can expect a lower interest rate. However, if your property is in a neighborhood that lacks these amenities, the rate is likely to go up, owing to the predicted low resale value of your property.
- Nature of Occupation
When you have a stable source of income, the lender is more at ease with offering a low-interest rate because they trust that you will repay the home loan within the loan tenor without the risk of any defaults.
- Borrower Risk Profile
If you are someone whose credit profile is deemed ‘risky’, lenders are less likely to offer you a low home loan interest rate and can instead charge you an additional risk premium for you to secure a loan. A borrower’s profile is classified as risky if they have a low CIBIL score, previously rejected loan applications, or have had trouble with credit repayment and default. Note that if your profile is seen as too risky, you stand the chance to be rejected for your home loan applications.
Choose the Right Home Loan Interest Rate Today
Apart from these seven factors, several other variables also determine your eligibility criteria for low-interest rate home loans. Factors like loan tenor and your loan amount are subjective and differ from lender to lender but could influence their decision to sanction the loan.
Before applying for a home loan, we suggest that you explore all your available options. Consider which type of home loan interest rate is best suited to your finances and will serve you well in the long run. Prospective borrowers can also visit our website today to browse through our competitive interest rates and home loan offerings.
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