Buying a home is a matter of massive financial investment. Also, it can be quite daunting considering how inflation and real estate prices have skyrocketed over the past decade. Needless to mention, the pandemic has drastically impacted people’s financial plannings. Paying a gigantic sum of money in one go is, therefore, not convenient for many. This is where Home Loans come into play.
Banks provide you with home loans and charge an interest rate for the amount lent. This loan is paid back in EMIs (Equated Monthly Instalments). The interest rate on your loan amount varies from bank to bank. Banks use a home loan interest rate calculator to consider various factors such as your salary, credit score, location of the property, etc.
Top Factors That Affect the Home Loan Interest Rate
Given below are the top factors that affect your home loan interest rate.
Your credit score is a critical measure of your capacity to repay the money you wish to loan. It shows that you are a responsible borrower. Banks calculate your credit score based on various factors such as payment history, current debts, financial obligations, etc. The lower your credit score, the higher the interest levied on your loan. A good credit score will help you get your desired loan at your desired terms.
Location Of The Property
Your property’s location is also an essential factor determining the interest rate. If your property is located in a posh locality or is newly constructed, the resale value will be high, resulting in lower Interest rates. On the contrary, the banks will charge a higher interest rate on a property with lower resale value.
Your Job Profile
Your income is the primary determinant of your loan amount. Banks prefer people with stable incomes when sanctioning loans. People with consistent incomes provide banks with a low risk of repayment failure. Salaried employees, government employees, private sector employees, doctors, and chartered accountants are considered low-risk individuals for granting loans. People from these areas of professions are given lower interest rates due to the stability they offer.
Type Of Interest
Banks primarily offer three categories of interest rates for home loans, i.e., fixed rate, floating rate, and mixed interest rate. The fixed interest rate remains constant throughout the loan period, irrespective of market changes. They often charge higher interest for fixed rates. A mixed interest rate implies that the interest rate is constant for a certain amount of time, after which the rate changes as per the market changes. The floating interest rate varies and changes as per the market for the entire loan duration. It provides banks with the least risk, for which they charge a lower interest rate.
Loan Tenure and Amount
Banks provide a low-interest rate on loans sanctioned for a short duration as they cause less risk to the bank. Similarly, loans that are to be repaid over long periods of time attract higher interest rates as the risk to the lender is high.
Loan To Value(L.T.V.) Ratio
The loan-to-value ratio (L.T.V.) stands for the maximum amount of a secured loan depending on the market value of the asset pledged as collateral. A large loan amount means higher risk for the bank, resulting in higher interest rates. Paying a higher down payment for the loan sanctioned lowers the interest rate for the remaining loan amount. It will bring down the loan amount and the interest rate of the loan.
Prevailing MCLR Rates
MCLR is the Marginal Cost of Funds based Lending Rate. It is the minimum rate of interest a bank can put against a loan. The MCLR is determined every 6 or 12 months. Various factors determine the MCLR, such as operating cost and Cash Reserve Ratio (CRR). As the MCLR increases or decreases, the interest on your housing loan will also increase or decrease respectively.
Make sure you research well and check the above-mentioned factors beforehand to avoid hassles during the loan application procedure.