What Factors Decide Your Home Loan Interest Rates?

The Home Loan rate of interest is crucial in determining the affordability of any loan. It is even more crucial in the case of a big-ticket and long-term loan, such as a Home Loan. Since Home Loans carry on for 20 to 30 years, even a minor difference in the Home Loan interest rates can help a Home Loan borrower save a lot of money in the long run. Low Home Loan interest rates help make Home Loan EMIs affordable and also help reduce the total cost of borrowing on the loan. A high-interest rate, on the other hand, may push one's EMIs into the unaffordable range and make the loan expensive and difficult to repay. Borrowers must, therefore, try their best to get the lowest interest rate possible when availing of a loan. This is possible only if the borrower has a clear understanding of the factors that affect Home Loan interest rates. So, let us look at Home Loan factors to consider when availing of a loan.

Loan-to-Value Ratio

Loan-to-Value ratio or LTV refers to the percentage of a property's market value that can be sanctioned as a loan. As an example, if your property is worth Rs.2 Crore and you avail of Rs.1.4 Crore as a loan, your LTV ratio would be 70%.

The LTV ratio is important as it determines the risk involved for the lender in lending money. High LTV ratio Home Loans carry a higher risk for lenders and therefore, lenders charge a high rate of interest on these loans. Low LTV ratio loans, on the other hand, are low-risk loans and therefore, lenders sanction these loans at a low rate of interest. Lenders sanction up to 90% of a property's value as a Home Loan. However, if you want to keep your Home Loan interest rates on the lower side, opt for a low LTV ratio loan. This does not mean pushing yourself to pay a higher down payment even if you cannot afford to. This simply means keeping the LTV ratio as low as comfortably possible.

Credit Score

Once you apply for a Home Loan, the first thing that your lender will do after receiving your loan application is check your credit score. The credit score, also known as the CIBIL score, is a three-digit number between 300 and 900 that indicates a borrower's creditworthiness and ability to repay a loan on time. Borrowers who have a high credit score rarely default on loan payments and clear loan EMIs as per the amortization schedule. Borrowers with a low CIBIL score, on the other hand, are quite likely to default on loan payments. Lenders sanction the lowest Home Loan interest rates to borrowers who have a high CIBIL score. Anything between 750 and 900 is considered a good CIBIL score by lenders. If you are planning to apply for a Home Loan, check your credit score online before beginning the application process. Apply only if your credit score is 750 or above.

Also Read: Know What CIBIL Score is Considered Good for a Home Loan

Income and Job Stability

When it comes to the Home Loan rate of interest, it all comes down to how likely it is that the borrower will repay the loan on time. Borrowers with a stable job and stable income are more likely to pay Home Loan EMIs on time as compared to someone who switches jobs often or does not have a fixed or permanent source of income. Therefore, while sanctioning Home Loans, lenders prefer borrowers who have a stable job or a profitable business, are employed with a reputed MNC or a government company and have a stable source of income. The age of the borrower matters too. Borrowers who are in their prime receive lower interest rates as such borrowers are more likely to receive promotions and income hikes and therefore, are also more likely to repay the loan on time.

Quality of the Property

Home Loans are secured loans. These loans are secured by collateral, which is the home bought with the loan money. In case of loan default, the lender can sell the pledged collateral to recover the loan money. This is why the quality of the collateral matters when it comes to Home Loans. Properties located in a central location and having all modern amenities draw a lower rate of interest than a property located on the outskirts of an old property that will require a lot of repair work. If you are applying for a loan, know that the lender will look at the quality of the property while deciding the loan interest rates to be offered to you.

Repo Rate and the Interest Rate Regime You Have Chosen

Home Loans are offered at two types of interest rates. When borrowers opt for fixed interest rates, the rate of interest remains the same through the tenor of the loan. When borrowers opt for floating interest rates Home Loan, the rate of interest varies based on external market conditions. External market conditions govern the Repo Rate. When the inflation within the economy increases and the growth of the economy enters the slump phase, the RBI increases the Repo Rate, which is the rate at which the RBI lends money to commercial lenders within the company. When the Repo Rate goes up, the Home Loan interest rates go up too. On the other hand, when the Repo Rate goes down, Home Loans become cheaper.

Lenders charge a higher rate of interest on floating interest rate Home Loans or floating interest rate Home Loans are more expensive than fixed interest rate loans as the risk involved for the lender is higher in the case of floating interest rate loans.

Final Words

Borrowers must try their best to avail of a Housing Loan at the lowest interest rates possible. Doing so makes loan EMIs affordable and loan repayment easy. One of the best ways to get yourself the lowest interest rate is to do thorough market research and be well-informed about what each lender is offering. Doing this will allow you to be well informed about the interest rates that you may be able to get, and this will also increase your overall negotiating power with lenders.

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