A housing loan provides the financial support required to purchase your dream home. However, the borrower has to repay it with an interest rate over a specific loan tenure. The loan’ s affordability largely depends on the interest rate the borrower pays on the borrowed money. Most people want to get the lowest interest rate to minimise their loan cost, but what forces cause changes in Home Loan interest rates? Knowing these forces helps a borrower better prepare for the borrowing and home-buying process.
Multiple factors influence the Home Loan interest rate. We have discussed some of the most important ones below.
- Interest Calculation Method
Housing finance companies offer two types of interest rate options: flat and reducing. The lender calculates the flat interest rate on the total loan amount throughout the tenure. However, in the case of a Home Loan reducing interest rate, the loan provider estimates the interest rate each month on the outstanding loan balance. Each EMI comprises the payable interest and principal repayment, and the outstanding balance gets smaller with each repayment.
- MCLR Rate
The Marginal Cost of Funds based Lending Rate (MCLR) is the minimum interest rate at which a lending institution can lend. Several factors influence these rates, including operating costs, CRR (Cash Reserve Ratio), the marginal cost of funds, tenure premium, negative carry on it, etc. Finance companies conduct an annual review for existing loan borrowers to reset the MCLR. That means the rate might decrease or increase according to the MCLR rate changes.
- Interest Rate Type
While borrowing a Home Loan, individuals can choose a fixed, floating, or mixed interest rate. The fixed interest rate remains the same throughout the loan tenure. Based on the RBI guidelines, according to market fluctuations and inflation rates, floating interest rate changes from time to time. A Home Loan with a mixed interest rate begins with a fixed interest rate for the first few years of the loan tenure and turns into floating for the remaining loan period.
- Loan-to-Value (LTV) Ratio
LTV (Loan-to-Value) ratio is the percentage of the property value that the financial institution finances through a housing loan. Home loan providers do not fund 100% of the property cost. They fund 80-90% of the home’s price, and the borrower has to pay the remaining cost from their pocket as a down payment. Borrowing the maximum available loan amount attracts a higher interest rate due to the higher credit risk involved. Making a bigger down payment can help in reducing the Home Loan interest rate and the EMIs.
- Applicant’s Credit Score
The loan applicant’s credit score is a significant force impacting the Home Loan interest rates. The credit score indicates an individual’s financial habits and discipline, repayment history, and overall creditworthiness for future loans. A credit score of less than 700 portrays higher credit risk, causing loan companies to charge a higher interest rate to cover their risk. On the other hand, a higher credit score indicates a lower credit risk, causing lenders to offer lower interest rates to such borrowers.
- Loan Tenure
Most housing finance companies allow borrowers to choose a loan tenure with EMIs adjustable into their monthly budget. Loan schemes with shorter terms have lower interest rates even if the EMI amount is larger. Loans with longer tenures have smaller EMIs but a higher interest outgo. With an online housing loan EMI calculator, aspiring borrowers can find the best loan tenure with EMIs suitable to their monthly repayment capacity.
- Job Profile
Applicants with a stable income stream are low-risk borrowers, while those with unstable jobs or professions have a higher credit risk. So, lending institutions offer lower interest rates to applicants with stable incomes, including salaried professionals, government and PSU employees, and people working in reputable private sector firms. Chartered accountants and doctors are the lowest-risk professionals in the self-employed category, grabbing lower interest rates. The applicant’s income, work experience, and financial obligations also influence the Home Loan interest rate.
- Property’s Location
The property’s location is a determining factor for the Home Loan interest rate. Properties located in an area with good connectivity and amenities will have a higher resale value in the future. On the other hand, properties in less desired neighbourhoods are cheaper, and their resale value does not increase significantly over time. Similarly, newer homes are more valuable than older properties with lower resale value. Lending institutions view properties with high resale value as lucrative assets. So, they charge a lower interest rate for lending loans against them. On the contrary, homes with low resale value attract higher housing loan interest rates.
The factors listed above are the major forces influencing the Home Loan reducing interest rate. While the borrowers can control some of them, others depend on the economy. So, keep all these factors in mind while selecting a Home Loan plan and get the best value loan for your requirements and budget.