Buying a home is one of the significant investments in one’s lifetime. Furthermore, it is facilitated by the RBI’s unchanged repo rate at 4%, which has boosted the housing sector in India. Resultantly, most financial institutions have also reduced their home loan interest rates in India, increasing home loan applications.
Factors That Affect Home Loan Interest Rates In India
The home loan interest rate varies from lender to lender, and several factors affect this rate. Hence, it is crucial to understand those factors that affect home loan interest rate in India:
- Credit score
An individual’s credit score determines the applicable interest rate. Thus, an applicant must maintain a high credit score because this is an essential factor in home loan eligibility criteria. A high CIBIL score reflects the applicant’s creditworthiness and credibility. Anything above 750 gives borrowers an upper hand as they can negotiate with a lender regarding this rate.
- Type of interest
Borrowers can opt for a home loan at a fixed or floating interest rate. The fixed interest rate remains unchanged for the entire tenor. Those individuals who opt for a home loan with this type of interest rate will not benefit from future cuts.
On the other hand, floating interest rates depend on the RBI’s policy and market conditions. However, this type of rate generally alters every quarter and is lower than that of fixed interest rate. In this case, the interest rate is proportional to that of the base rate, although any change in the base rate impacts the tenor.
However, a mixed interest rate commences with a fixed rate of interest rate for a stipulated period and then switches to floating interest rates.
- Location of the property
The financial institution sanctions the home loan amount after assessing the property’s location. For example, a property located near the metro and railway stations, hospitals, shopping malls, banks, and schools will likely have a high resale value. On the other hand, those properties with lower amenities will pay a higher interest rate.
- Loan quantum
Borrowers should make a wise decision while choosing the loan quantum to help fetch a lower interest rate. For instance, a higher loan amount involves significant risk for the lender. Hence, lenders may charge a higher home loan interest in India to compensate for the risk.
- Loan to value ratio
The loan-to-value ratio is the maximum amount a lender extends to the borrower. It is a percentage of the current market value of the property. Most lenders approve a home loan with an LTV ratio of 75%. Most experts recommend making a substantial down payment to reduce the LTV.
- Benchmark rate of lending
The Repo Linked Rate and Marginal Cost of Funds based Lending Rate are the two types of lending rate. The latter can keep altering within an allocated time and is decided upon by the financial institutions. On the other hand, the former is linked with the RBI’s repo rates and can change according to the policies.
- Tenor of payment
Borrowers can choose to opt for a longer repayment tenor as this will result in paying a lower EMI. However, a shorter tenor helps one significantly save the total borrowing cost. Therefore, it is best to calculate the payable EMIs before taking a home loan as there are multiple benefits involved. One can use a home loan calculator for this purpose.
Pre-approved offers are extended by financial institutions for eligible customers. This facility allows individuals to skip the hassle of documentation and verification and avail a loan faster. This is because of the existing relationship between the lender and the customer. These offers are applicable on various financial products, including home loans and loans against property. Borrowers can check their pre-approved offers by submitting their contact details.
Thus, it is vital to keep in mind all of the above factors that affect the home loan interest rate in India. This would help one choose a loan that caters to his/her requirements per financial affordability.
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