Home loans have now become an indispensable part of the home buying process. Many lenders help individuals realize their dreams of owning a home with easy home loans. The interest rates on these loans vary from one lender to another and from one borrower to another.
But what are the factors that influence these rates? Read on to find out.
Factors that Determine the Interest Rate on Home loans
Many factors affect the current home loan interest rates, as mentioned below.
Earlier, financial institutions relied on base rates as the benchmark rate. But now, MCLR, or the Marginal Cost of Funds Based Lending Rates, is the minimum interest rate below which banks cannot lend.
MCLR loans come with a predetermined re-set date during which home loan interest rates are reviewed. So any change in the MCLR will also change your interest rate.
When you learn about how to get a good home loan, you will notice that a credit score is one of the vital factors considered.
A credit score is a numeric representation of your financial discipline, repayment history, and credit worthiness. Those with credit scores of 750 and above are considered more creditworthy and have a higher chance of landing the best deals on home loan interest rates. However, those with lower scores are often charged higher interest rates.
So make a habit of checking your credit score at regular intervals and take corrective measures whenever required to improve your score.
Loan Amount and Tenure
Most banks charge higher interest rates for loans of higher amounts. For instance, home loans above 30 lakhs may be charged a higher rate than loans below the figure. Making higher down payments and lowering your EMI can help in this case.
Also, loans with higher tenure attract a higher rate, so choose your repayment duration wisely.
Type of Interest Rate
Another factor that determines current home loan interest rates is the type of interest rate.
There are three main types of Interest rates on home loans: fixed, floating, and fixed interest rates.
Lenders can alter floating interest rates whenever there is a change in the repo rate released by RBI. However, that option is not available in loans with fixed interest rates. So to cope with the higher risk exposure, financial institutions usually levy higher rates on fixed-rate loans. This makes up for their loss in interest income.
Mixed interest rate home loans are loans where interest is fixed for a set period. After the defined period is over, floating rates become applicable to them. The interest rates on fixed-rate home loans are often higher than floating-rate loans, but they may be lower than fixed-rate home loans.
Loan-to-Value (LTV) ratio shows the percentage of the total property value financed via a home loan. A higher LTV ratio is considered risky for the bank, and naturally, higher interest is charged on loans.
So always compare your LTV ratio before applying for a loan.
Higher down payment will lower the disbursal amount. Subsequently, the interest rate on your loan will also be lower.
Home Buyer’s Job Profile
Banks and financial institutions usually prefer loanees with stable jobs and steady incomes. Such individuals fall under the low-risk category and are offered lower interest rates of loans. They include salaried professionals, doctors, chartered accountants, and people in other high-earning professions.
Even among the salaried, PSU and government employees are most favored. On the other hand, individuals with inconsistent jobs are categorized as high-risk customers and charged higher interest rates. These often include self-employed professionals with unstable earnings.
Location of the Property
The interest rate also varies depending upon the location of the property.
A property located in an urban location attracts a lower interest rate than a one located in remote or isolated areas. This is because homes in good localities with greater connectivity have higher resale value. The opposite may be true for homes in less desired neighbourhoods.
Also, newer properties have more value than older properties. Lenders consider all these points while charging interest rates on your home loan.
All the above factors influence the interest rate on your home loans. However, different financial institutions may give different weightage to each of them. So keep these factors in mind and conduct some research on lenders to get a more affordable home loan.