With a loan tenure that can extend beyond 15 years, a home loan is one of the more significant financial commitments that an individual can take in life. Additionally, with the instalment amount being a substantial one, any minor change in interest rate can make a huge difference.
Since financial institutions consider different factors for housing loan interest rate calculation, being aware of them is imperative. It effectively allows an individual to make an informed decision while applying for one.
Top 6 factors that can affect the housing loan interest rate
1. Monetary policy of RBI
Since financial institutions follow the guidelines as stipulated by the RBI, any changes in its monetary policy also affect the home loan interest rates. For instance, when RBI lowered the repo rate to 4%, it immediately prompted lenders to lower the interest rate on housing loans as well.
2. Type of Interest
In India, housing loan is available against two interest rate types, fixed and floating. As their names suggest, with the floating one, the rate alters with market conditions and shifts up and down accordingly. Contrarily, the fixed one remains constant throughout the tenure.
Therefore, careful selection here is crucial to ensure long term gains.
3. Credit Score
A credit score is one of the deciding factors of applicable housing loan interest. This score represents the creditworthiness of a borrower and allows lenders to gauge that particular applicant’s repayment capabilities.
Individuals who can maintain a healthy credit score, i.e. 750 or above will have a better chance to negotiate a competitive interest rate. Additionally, individuals should also know how credit score can determine their home loan EMIs to optimize benefits.
4. Down payment and LTV ratio
A point to keep in mind is that down payments and interest rates are inversely proportional. It means with a sizable initial payment, one can reduce the home loan interest rate, and vice versa. Since with a higher loan amount, the lending risks are also high; financial institutions charge more interest.
Moreover, a higher down payment results in a lower LTV ratio, which favors a borrower. It not only keeps the interest rate down but also allows them to negotiate better borrowing terms.
5. Loan Tenure
Like down payment, loan tenure also has an inversely proportional relationship with the housing loan interest rate. It means with a longer loan repayment period; one needs to pay a higher interest rate. The reason for this being - since lenders are offering the funds for an extended period, they are reaping more returns from the same.
Therefore, prospective home buyers should be aware of the ways they can reduce their home loan tenure.
6. Property location and age
Location of the property also plays a factor in determining interest rates. Properties in popular locations with great amenities hold a better resale value. Further, the resale value of a new property is higher compared to an older one. Keeping these pointers in mind, lenders often alter the interest rates on a home loan.
Considering these factors before availing a home loan is imperative to make a better decision. Furthermore, one should also opt for a lender that provides pre-approved offers, streamlining the loan application process and saving time. These pre-approved offers are available on home loans, loans against property, etc. Borrowers can check their pre-approved offer by submitting a few essential contact details.
Since the housing loan interest rate has a significant say in any home loan application, it is better to learn in-depth about it and its effects beforehand to make an informed decision.