What factors affect your home loan interest rate?

by Ramesh Kumar Financial Advisor

In recent times, the popularity of home loans as a convenient way to access funds for purchasing a residential property has steadily increased owing to low lending rates. Nonetheless, to make the most of repo rate cuts declared by the RBI and consequent lowering of interest rates, it is crucial to choose a lender judiciously.

Now, there are certain ways to reduce the home loan interest rate to make way for efficient saving. Following these factors can help a borrower optimise the usage of the disbursed amount, without worrying about EMIs.

What is a Home Loan?

A home loan offers access to substantial funds from a financial institution to purchase a house or residential property. An applicant must submit documents related to the property he/she is interested in purchasing as a security until the outstanding balance is repaid. A lender levies an interest rate against the loan amount based on an individual’s creditworthiness and several other factors.

Moreover, certain factors can directly or indirectly affect a borrower’s housing loan interest rate.

Factors that affect the home loan rates

  1. CIBIL score

A prospective borrower must always check his/her CIBIL score to improve credibility. Ideally, lenders prefer loan applicants with a credit rating of 750+ and good repayment history. An individual with a CIBIL score of 850 can easily negotiate with the existing lender regarding interest deduction on a home loan.

 A smart way to improve one’s creditworthiness is to clear all the outstanding dues efficiently. Hence, one must know what is the best credit score for a home loan and how to improve it.

  1. Loan amount

The loan amount applied plays a crucial factor in determining the interest rate levied against it. Financial institutions have to follow specific rules that determine the interest rate. Ideally, a higher loan amount would attract a higher interest rate as the risk from a lender’s side is elevated. 

Therefore, opting for a small loan amount facilitates easier repayment and reduces the hassle of high-interest rates.

  1. An applicant’s income

The next factor that affects home loan interest rates is a borrower’s income structure. Lenders give preference to salaried employees due to the reliability of timely repayment. The interest levied on a home loan for a salaried applicant is comparatively lower. 

  1. Higher down payment

One can also reduce the home loan interest rate by making a high down payment. The financial institution gives more preference to borrowers making a high down payment as this limits the amount availed as an advance. As the risk from the lender's end is reduced, a home loan borrower can easily receive a lower interest rate.

In this regard, few financial institutions also provide tailored features such as pre-approved offers to borrowers for hassle-free application. Such offers are available on products like loan against property, home loan, etc. Check your pre-approved offer by entering your name and contact number on the lender’s website.

  1. Lending benchmarks

Choosing a lender following the Marginal Cost of Funds-based Lending Rate or MCLR benchmark on home loans is also a convenient way to access affordable interest rates. A change in the MCLR results in lowering the home loan interest rate. Usually, MCLR linked home loans are inexpensive and affordable compared to fixed-interest rate loans.

  1. Location of the property

The location of the residential property also affects home loan interest rates. The value of a property determines the loan amount disbursed. Ideally, a residence near railway stations, transport facilities, hospitals, and markets has a higher loan value. The age of a mortgaged property also affects loan value and interest rate simultaneously.

Apart from gaining information on the factors affecting lending rates, first-time borrowers can check tips to decrease their home loan interest to minimise the EMI burden.

Thus, these were some factors that affect home loan interest rates, which should be kept in mind while applying for home loan. The loan amount which will be selected by the borrowers will automatically be converted into easy EMI.

Lastly, borrowers should keep themselves updated with the terms and conditions of the home loan and its variables to find smart ways to manage the credits sanctioned. 

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About Ramesh Kumar Junior   Financial Advisor

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Joined APSense since, January 31st, 2021, From Pune, India.

Created on Feb 1st 2021 23:10. Viewed 468 times.


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