One of the critical factors that determine the affordability of a home loan is the interest rate charged by the lender. Read on to know more about the different factors that affect the home loan interest rate.
Applying for a home loan is probably one of the most important financial decisions you may take in your life. It is a big commitment, and with the repayment tenure ranging from 15 to 30 years, even a slight difference in the interest rate can have a significant impact on the overall loan cost. As a borrower, you may compare the various offers by the lenders and choose the one with the lowest interest rate. But, do you know how the lenders fix the interest? Here are five factors that affect the interest rate.
- Credit Score
All lenders in India consider the credit score as one of the critical factors while evaluating the home loan application. Typically, the lenders consider a credit score of 700 as a benchmark score to approve the loan. So, if you meet the lender-specific credit score requirement or have a higher score, it would reflect your creditworthiness in the positive light. You would have better chances of getting the loan approved at a lower interest rate as compared to those who have a lower score.
Hence, before you start the home loan application process, it is paramount that you check the credit score, and if it is low, take corrective measures to avoid rejection of your home loan.
- Loan Amount
This is another significant factor that has an impact on housing loan interest rates. Generally, the lenders charge a higher interest for a higher loan. The interest rates vary from lender to lender. So, while comparing the best loan offer, choose a lender that offers the loan at a lower interest rate as it has a direct impact on the EMI outgo.
- Loan duration
Generally, loans with a shorter duration have a lower interest rate, but such loans may have a higher EMI. If you can afford to pay high EMI every month, you can apply for a loan with a shorter tenure, which would reduce your overall loan cost. You can use the online EMI calculator to determine the exact EMI for the amount you wish to avail and decide on the tenure accordingly so that the EMI is affordable.
Generally, lenders offer home loans at a lower interest rate to applicants who are salaried employees and have a stable source of income. Among the salaried employees, the lenders usually prefer the applicants to be employed with government undertakings, or in renowned corporate companies. The lenders charge higher interest for self-employed applicants mainly of the unstable income.
- LTV Ratio
The Loan to Value ratio refers to the proportion of the property’s value that can be financed through a home loan. The remaining part must be paid from your pocket. As per the Reserve Bank of India mandate, lenders can sanction up to 90% of the property’s value if the loan availed is less than or equal to 30 lakhs. So, if you apply for a larger loan, it would attract high interest rate as the lenders have high credit risk.
- Interest type
You can choose between a fixed, floating or mixed interest rate. The floating interest rate changes based on the changes in the market conditions; if the RBI lowers the interest rate, then your EMI will be lower and vice-versa. With a fixed interest rate, the interest rate will remain the same throughout the loan tenure. Most experts recommend home loan borrowers to opt for a floating interest rate because the interest payment is much lower than a fixed-rate loan in the long run.
The above-listed factors influence the interest rate of your home loan. While some of the factors are within your control, the others depend on the market condition.