Do you know these Top 10 Factors That Affect Your Home Loan Interest Rate
In the present times, a middle-class person can’t purchase a residential property on a down payment. This is where the role of a Home Loan comes to the fore. A Home Loan turns a dream of owning a house into reality for the majority of the aspiring homeowners. With the central government aiming for affordable housing and housing for all by 2022, the time is right for you to also realise your dream of becoming a homeowner. While looking at various housing loan options available in the market, you need to compare several important parameters pertaining to different Home Loan offerings.
As a Home Loan is drawn usually for a substantial amount and comes with an extended repayment tenor, you need to pay particular attention to the interest rate levied by the various financial institutions. While a slightly higher interest rate can result in a substantial financial burden, similarly, a reduction in the Home Loan Interest Rate can translate into substantial savings for you. The lower the rate of interest, the lower will be your EMI and easier would be your repayments.
While some factors affecting the home loan interest rates are beyond your control, on the other hand, there are many factors that you can control and successfully avail the best deal at an attractive rate. The factors that affect your Home Loan interest rate are as follows:
1. Credit score
Your credit score is considered to be one of the most important factors affecting your Home Loan rates. When you Apply for a Home Loan, the financial institution will check your credit score to ascertain your creditworthiness and determine your credit behaviour. In India, the CIBIL score is followed by most financial institutions as a benchmark wherein a CIBIL score of 750+ is regarded as excellent while any score below 650 is considered as poor. A good CIBIL score is rewarded with low-interest rates as it translates into reduced risk for the lender. So, you must undertake all efforts to enjoy a CIBIL score of 750+ as it will allow you to access the lowest Home Loan Interest Rates.
2. Loan amount
This is another factor which plays an important role in determining the rates. Usually, lenders have a number of slabs according to which the rate of interest changes. As the loan amount increases, the rate of interest also increases as when the loan amount is higher, the risk for the lenders is high. Therefore, to compensate for the higher risk lenders charge a higher rate of interest on higher loan amounts.
For instance, Bank of Baroda Home Loan Interest Rates are as follows:
- For Loan amounts up to Rs. 75 lakhs – MCLR + 1%
- For Loan amounts above Rs. 75 Lakhs –MCLR + 1.25%
3. The income of the applicant
The income of the applicant is also one of the major deciding factors for the rate of interest on Home Loans. Usually, the interest rate offered to salaried employees is lower compared to the Home Loan interest rates offered to self-employed applicants. This is because, a salaried individual’s income is considered to be stable at any given point of time until the age of retirement, while, that is not the case with self-employed individuals. The business income depends upon various external factors.
4. Interest rate type
While offering Home Loans, lenders offer two types of interest rates. You can choose either type, and that will be applicable throughout the repayment tenor. The two main types of interest rates offered are fixed and floating rates.
Fixed interest rates allow the borrower to repay the loan amount in equal and fixed monthly instalments throughout the tenure. The advantage of this type of interest rate is that it is not affected by the current financial market situation.
Floating interest rates, on the other hand, keep changing according to the financial market fluctuations. This type of interest rate is totally dependent on the base rate offered by the lenders. So, whenever there is a change in the base rate due to financial market trends, the interest rate is revised accordingly. The floating interest rates are usually cheaper than fixed interest rates.
5. Gender of the applicant
This is also a critical factor affecting your Home Loan, as many financial institutions offer a concession on interest rates for women. Women borrowers are offered a concession of up to 0.5% on the prevailing interest rates.
6. Internal & external lending benchmarks
MCLR (Marginal Cost of Funds based Lending Rate) is the benchmark followed by most financial institutions offering home loans. Previously banks and lenders used the base rate as a benchmark. This type of loan usually comes with a reset clause at regular intervals of 6 or 12 months. Any change in the MCLR during these intervals will result in the change of home loan interest rate. The MCLR linked Home Loans are more affordable and lower in costs than the fixed interest rate loans.
From Oct 1, 2019, RBI has mandated all floating rates loans to be linked with external benchmarks such as repo rate and treasury bills lending rates. Thus, the rate of external benchmarks will significantly affect the loan rates.
7. The location and value of the property
This is also one of the deciding factors for lenders as the location plays a very important role in determining the value of a property. Homes with good amenities in the vicinity like supermarkets, schools, shopping centres, bus stops, railway stations, banks, hospitals are likely to have a higher value than properties with fewer amenities and poor connectivity. The lenders usually consider homes in a location with poor amenities to be lesser in value, as the resale of the property will be difficult. This rule applies to the age of the property as well. The newer the property, the more value it offers to the lender.
8. Eligibility for Government Subsidy
The government of India is pushing for affordable housing through Pradhan Mantri Awas Yojana. Additionally, in the latest budget, the government has announced additional deduction in income tax for interest paid on Home Loans for affordable houses, i.e. units costing up to Rs. 40 Lakhs. If you are eligible for these benefits, then you can enjoy lower interest rates for your Home Loan.
9. Down Payment
You can avail the benefits of a lower Home Loan interest rate by making a higher down payment. Lenders consider a higher down payment as a sign of your financial stability. This significantly reduces the risk for the lenders, and they are able to offer you lower interest rates on your Home Loan. Ideally, you must try and make at least 25% down payment to enjoy the best Home Loan interest rates.
10. Nature of employment
If you are employed with a reputed corporate or a central government undertaking, you enjoy excellent job security. This means that you will enjoy a steady source of income till the age of your retirement, reducing the risk for the lenders. Therefore, you can get lower interest rates from various financial institutions based on the nature of your employment.
You must, therefore, consider these factors carefully while applying for a Home Loan, and enjoy the benefits of lower Home Loan interest rates. This will help you save a substantial sum of money towards the interest cost.
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