Home loans have gained immense popularity, leading to an increasing number of individuals availing such advances to buy their dream house. Numerous residential properties have been brought within the reach of the middle-class populace, thanks to such financing options.
There is, however, an enormous outgo that takes place in the form of interest payment, apart from repaying the principal amount of the loan. In certain instances, the amount of accumulated interest may be quite substantial. Due to this aspect, it is important to know the factors which influence your home loan interest rate.
What are the different factors that impact home loan interest rates?
- Amount of loan
Financial institutions usually follow various slabs which go into the determination of the interest rate for a home loan. With changes in the loan amount, home loan rates also change. It means that with a higher quantum of loan, the rate will also be on the higher side. It is due to the fact that an increase in the loan amount also means an increased risk for the lender.
- Credit score
Housing finance companies consider the credit score of a home loan applicant to be one of the essential aspects to evaluate the risk associated with lending. An applicant with a credit score above 750 is considered to be more creditworthy. In effect, such applicants hold a better chance of availing a loan at a lower interest rate and other favourable terms. Similarly, a low credit score will lead to a relatively higher home loan interest rate.
- Type of interest rate
Home loan interest rates are primarily of two kinds – (a) Fixed interest rate, and (b) Floating interest rate. The latter changes in accordance with fluctuations in market trends and is dependent on the external or internal benchmarking rates. Such interest rate is comparatively cheaper.
Fixed interest rate is insulated from market fluctuations, and it is usually on the higher side. The type of interest is one of the most important things you must know before taking a home loan.
- External benchmark rate of bank
The Reserve Bank of India indicated that floating home loan rates can be based on four external benchmarks – (1) repo rate, (2) 6 months’ Treasury Bill rates, (3) 3 months’ Treasury Bill rates, (4) Benchmark market rate as established by Financial Benchmarks India Private Ltd. Hence, whichever benchmark is chosen by the lending bank, the rate of interest will vary accordingly.
- Valuation and location of the property
The market price of the chosen property and its location will be taken into consideration as well. If, say, the property is located in an area with sub-par amenities, the resale value of the same will also be less. In that case, the interest rate may increase.
- Job profile of a loan applicant
Applicant’s income has a major bearing on home loan interest rate. Salaried employees are usually offered a lower interest rate as opposed to self-employed individuals. It is due to the fact there are a host of external factors that influence the income of the latter, and the risk factor is higher. Incidentally, there are benefits of home loans for government employees owing to their job security.
Certain financial institutions also extend pre-approved offers to existing customers who meet the necessary eligibility criteria. Such offers include various financial products, including home loan and loan against property. You can check your pre-approved offer online by providing few basic details such as name and contact number.
- LTV ratio
The Loan-to-Value (LTV) ratio is the proportion of property value that can be financed through the proceeds of a loan. The remaining amount will have to be self-funded. For an amount of up to Rs.30 lakhs, LTV ratio can be as high as 90% while for an amount above Rs.75 lakhs can avail an LTV ratio of 75%. With a lower LTV ratio, the down payment will be more, and consequently, the home loan interest rate will be lower.
It is necessary to apply for a credit only after understanding the factors that can affect the rate of interest. In that way, one can improve their creditworthiness, and avail better terms against such credits.