As per a recent study, the home loan segment is expected to register a 22% CAGR between 2021 and 2026. This study has arrived amid a time when different financial institutions are offering competitive interest rates to make home loans more accessible. Therefore, when applying for a home loan, potential borrowers must be wary of the factors that affect the interest rates.
Usually, home loan interest rates are dependent on factors like CIBIL score, loan amount, property value, etc. Therefore, an individual needs to be armed with information about these factors to secure the lowest interest rates.
Take a look at the list of factors that affect your housing loan interest rate.
8 major factors that affect your home loan interest rate
Some of the factors that affect interest payable throughout loan tenor are listed below:
- Credit score
An individual’s CIBIL score is a primary determinant of the interest rate payable. When applying for a home loan, lenders check the credit score to ascertain the reliability of the applicant.
This score is a summary of the individual’s credit history which includes loans previously availed, credit card usage, and payment history. So, review your credit history and check for errors before applying. Minor errors can cause a drop in the overall score.
Usually, individuals with a credit score of 750 or above are deemed to be safe as financial lenders and are offered lower housing loan interest rates.
- Property location and price
Many financial institutions offer different interest rates depending on the location or area a property is located in.
The interest rate is relatively lower for apartments or properties located closer to the city centre. Therefore, try enquiring about the property price plus the closing cost minus the down payment beforehand. This helps derive a proper estimate of the loan amount available on the property. Use the housing loan calculator to learn about the repayments.
- Income of the applicant
The individual’s income is also a major determinant of the interest rate payable. Financial institutions prefer sanctioning loans to applicants with a stable income. Therefore, make sure to declare any additional source of income to reinforce your repayment capacity.
- Down payment
It is advisable to make a higher down payment right at the outset before availing a loan. Home loan interest rate goes down if the down payment amount is higher. Furthermore, it lowers the EMI payable as the loan amount payable is lowered.
- Repo rate
One of the main tools used by the RBI to keep inflation under control, a repo rate, is the rate at which financial institutions borrow from the RBI. Usually, a change in the repo rate also impacts the MCLR. This affects the housing loan interest rate at which a financial institution offers credits to applicants.
As per a guideline issued by the RBI, the LTV ratio for home loans can go up to 90% of the property value. This high LTV ratio usually indicates a riskier transaction. This causes many financial institutions to charge higher interest rates.
A shorter tenor attracts a lower interest rate payable on home loans and top-up loans. This might lead to higher EMI payments; however, it reduces risk of debt accumulation. So, opt for a shorter tenor to reduce your home loan interest rates.
- Interest rate type
There are two types of interest rates – fixed and floating. Changes in the market can cause floating interest rates to vary throughout loan tenor. In most cases, floating interest rates are lower than fixed rates. Fixed rates remain constant throughout the tenor.
Further, check the home loan eligibility in India to ascertain compliance and increase your chances of availing lower rates. Also, compare the interest rates offered by different financial institutions before sending an application.
Apart from interest rates, check other benefits offered by lenders.
For instance, few financial institutions provide pre-approved offers to simplify the home loan application process. These offers are applicable on other financial products like loans against property. To check your pre-approved offer, enter your name and contact number.
So, if you plan on applying for a home loan, follow these above-mentioned points to reduce your cost of borrowing.