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Buying a home is a big financial decision, and the substantial amount needed to materialise the purchase sometimes is a hindrance for most prospective home buyers. But, with the availability of home loans, buying a dream house has become feasible.
However, to make borrowing affordable, you must assess all the loan terms properly, and one of the crucial ones here is the home loan interest rate. Lenders scrutinise varied parameters before levying home loan rates. Hence, it is important to be well acquainted with all those parameters to get a competitive home loan interest today. It will help lower the overall borrowing cost and make repayment seamless.
Factors That Affect Home Loan Interest Rate
A slight difference in the lending rate can significantly impact the cost of borrowing. Hence, before you go ahead with a major financial commitment like a home loan, you must know the factors affecting the interest rates.
Property Location and Value
Before deciding on the lending rate, lenders will evaluate your property’s location, age, or market value. You can get a lower interest rate if your property is in a prime location with good amenities. On the other hand, properties in the interior with inadequate amenities will have less resale value; hence the lenders may levy higher interest rates.
The same is applicable in the case of the age of the property. New properties are considered more lucrative. Hence it attracts lower interest rates. On the contrary, a property that is old and is not located in a less desirable neighbourhood will attract a higher interest rate.
Interest Rate Type
Borrowers can choose between fixed and floating home loan interest rates. The interest rate they opt for determines the cost of borrowing. As the name suggests, fixed interest remains constant throughout the repayment tenure. It remains unaffected by market ups and downs.
On the other hand, the floating interest rate varies depending on the market condition. If any change in RBI norms results in a lower interest rate, borrowers will enjoy the interest reduction. This helps in saving a considerable amount of money. It is said that floating interest rates are more cost-effective than the fixed interest rate.
Income Stability
The employment and income status of the borrower have a significant influence on the home loan interest rate. By assessing these, lenders can realistically deduce borrowers’ repayment potential. If the applicant has a higher or stable income source, it is likely that they will not default on the loan repayment.
Considering them to be low credit-risk individuals, lenders are likely to levy lower interest rates. A borrower’s repayment capacity can be questioned if they frequently change jobs; hence lenders may offer higher interest rates.
Loan Tenure
Even the home loan tenure affects the overall loan expenditure. Shorter loan tenure will help reduce the interest outgo and help wrap up the repayment faster. However, it may result in higher home loan EMI liabilities. Choose a shorter repayment term if managing higher EMIs does not cause additional monetary burdens.
On the other hand, a longer loan tenure will have lower EMI liability, but the interest outgo will be more. To make an informed decision, borrowers can use a home loan EMI calculator.
Loan-to-value Ratio
Loan-to-value (LTV) ratio refers to the percentage of property worth that can be availed through a loan. Generally, a lower LTV ratio means a greater chance of getting faster loan approval. Given there is less credit risk, lenders will charge lower interest rates. On the other hand, a higher LTV ratio will attract a higher home loan interest rate, given its higher credit risk.
In such scenarios, a substantial down payment helps bring down the loan principal, which further helps lower interest rates and the loan burden. To put it in simple words, the loan amount that borrowers opt for also has a bearing on the interest rate.
Loan-to-value Ratio
Though a home loan is a collateral-backed credit option, a higher credit score will position you advantageously. A credit score numerically represents a borrower’s credit history and financial habits. A healthy credit score shows that you have been responsible for EMI payments and can be eligible for better loan terms and deals. You can negotiate with the lender as well.
Lenders will consider a borrower a high-credit-risk individual if they have a substandard credit score. Hence, borrowers must always strive to maintain a higher credit score. To do so, be punctual with the EMI payment and clear all the debt obligations.
These are certain factors which will be able to fetch a lower interest rate.
MCLR Rates
The Marginal Cost of Funds Based Lending Rates (MCLR) is the minimum interest rate that financial institutions can lend loan principal at. RBI determines it and depends on factors like Cash Reserve Ratio (CRR), operating cost, marginal cost of funds, etc.
The MCLR undergoes an annual reset. Based on the alternations in the MCLR, the interest rate charged on the home loan amount will increase or decrease. No financial institution can set the lending rate lower than the prevailing MCLR.
Final Thoughts
A home loan makes purchasing or constructing a dream house possible. But, to make the EMIs affordable and reduce loan expenditure, borrowers must aim to fetch lower interest rates. It can be financially strenuous for borrowers if they have not considered the home loan interest rate before availing it. Interest rate is a significant factor determining how economical or expensive the credit option will be in the long run.
