Home loan rates are now the lowest that it has been in the last 15 years. This was due to the consecutive repo rate slashes since February 2019. Even though rates are presently low, potential borrowers must understand what other factors are responsible for determining home loan interest rates, apart from macroeconomic conditions.
Working on or considering the following factors can help an individual avail of housing credit at affordable rates, thereby reducing the EMI burden and the total interest. One must assess his/her repayment capacity and unique credit profile before sending out an application. Also, a comparison of the various rates available in the market can also save considerable interest outgo during loan repayment.
Important factors that influence your home loan interest rates
Listed below are some major factors that affect loan interest rates.
Borrowers’ credit score
Credit score determines your home loans EMIs and interest rates since housing finance companies gauge non-payment risk posed by a borrower by studying these credit profiles. This report of a borrower’s repayment history and financial discipline is indicative of his/her creditworthiness. Borrowers who have at least 750 or higher credit scores indicate low credit risk and secure lower home loan interest rate from the lenders.
Location of the property
Lenders often review the location of a property while charging interest rates. For example, a property with proper amenities and a favourable location will be viewed as valuable to lenders, and consequently, they will charge lower interest rates. Whereas, properties in less desired locations will have low resale value and will cause lenders to levy higher interest rates. Similarly, loans for new properties are available at low-interest rates and vice-versa.
Loan to value ratio
Loan to value ratio is the total percentage of a property’s value that can be paid with a home loan. If a borrower opts for a significant principal, it indicates higher lending risk. The lenders charge higher interest rates, under such circumstances. On the other hand, if a borrower ensures significant down-payments, it will reduce the loan amount and, in turn, lead to a decrease in the loan interest rates.
Type of interest rates
There are two types of interest rates when it comes to home loans: fixed and floating. Usually, borrowers who opt for floating interest rates may enjoy lower initial interest rates. However, if there is an increase in market rates, the overall interest will increase accordingly and vice-versa. On the other hand, with a fixed interest rate, individuals can pay a particular EMI amount throughout the loan term, and it will not decrease, or increase based on market volatility.
If loans are borrowed for a shorter period, the interest rate is limited. On the other hand, loans for significant tenors will force borrowers to bear a significant amount as interest. Borrowers can use the home loan EMI calculator available on most of the lenders’ websites to optimise tenor and EMI, as per their financial capacity.
Besides the rates, another challenging aspect of availing of home loans is the convoluted procedure for the application that some lenders follow. Fortunately, existing customers of reputed financial institutions can minimise documentation and other hassles with pre-approved offers.
Pre-approved offers ensure simple and quick loan applications. They are available on home loan, loans against property and more. You can check your pre-approved offer by submitting only a few details.
After having learnt about the factors that influence home loan interest rates, borrowers must stick to reliable HFCs to acquire the best deals and interest rates.