The home loan interest rate is an important element that can make or break your dream of purchasing your own home. It can affect your affordability and alter your EMIs. Which is why it is crucial to understand the factors that impact your home loan interest rates.
While some of these are based on the economy and are beyond your control, others are based on your financial decisions that can be altered. Here are 6 factors that determine your home loan interest rates:
- Credit score
Your credit score is the reflection of your creditworthiness. It is one of the most important factors affecting your interest rate. It is through the credit score, that the lender judges your repayment capacity and accordingly determines the interest rate. A low credit score might indicate that you could face difficulty in repaying the loan amount. As a result, they may charge you with a high-interest rate increasing the EMI payout. On the other hand, if you have a high credit score, you can negotiate with the lender for a lower rate of interest or more favourable terms.
- Job profile
Your income and job profile area significant determinants of the interest rate. Lenders consider borrowers with a high income and stable job profile as low-risk borrowers. If you have a stable job profile (meaning you have been employed in an organisation for a long time) you are more likely to be offered a low rate of interest. Lenders try to gauge your cash flow in the future. Accordingly, salaried professionals having a stable job profile or those employed with PSUs and government organisations are considered low-risk borrowers. For such applicants, usually the interest rates are relatively low and competitive.
- Loan amount
A high loan amount attracts a high-interest rate. It is because the higher the loan amount the higher is the risk to the lender. Usually, down payment and interest rates are inversely proportional. So, if you can pay a higher down payment, you can ask the lender to charge you a lower rate of interest. However, if you pay a lower down payment, it means that the lender has to bear a high risk owing to the high loan amount.
- MCLR or other Benchmark rates
Your interest rates are based on external benchmark rates like the MCLR. MCLR is the Marginal Cost of Funds-based Lending Rate, which is the minimum rate banks can lend you money at. These rates are reset periodically by the banks. So, if there is a change in these rates, your interest rate would increase or decrease accordingly. Increasingly, banks are now relying on the Repo Rate of the RBI to benchmark the loans. Hence, a change in Repo Rate could also affect the interest rate.
- Property location
If the property that you are buying with a home loan is located in a remote location, is old or dilapidated, you might be charged a high-interest rate. This is because, in case of default, the lender could face difficulty in liquidating the property. On the other hand, if the resale value of your property is high due to its location or condition, you could get a lower interest rate.
- Type of interest
There are two types of interest rates on a home loan- fixed rate and floating rate. As the fixed rate of interest remains constant throughout the tenure, they are usually higher than the floating rate of interest. Also, the floating rate of interest is subject to market rates that make them susceptible to changes during the tenure of the loan. Experts opine that in the long-run floating rate turns out to be cheaper than the fixed rate.
Apart from these factors, the loan to value ratio and tenure of the loan could also impact your rate of interest and thus your EMI payout.