Home loan

Major Factors that Affect your Home Loan Interest Rates

In line with the RBI’s decision to leave the current repo rate at 4% to boost India’s housing loan segment, lending institutions have also kept base home loan interest rates affordable. This can impel more prospective homebuyers to seize this time to avail such funds. However, there are certain factors they should consider before zeroing in on a loan scheme to avail hassle-free repayment.

Factors affecting home loan interest rates

  • Loan amount 

The primary step to enjoying competitive interest rates is assessing one’s exact loan requirement and borrowing accordingly. While under-borrowing can create a shortage of funds, over-borrowing can result in an unnecessary repayment burden. Generally, financial institutions tend to set higher interest rates against a larger loan amount since that poses a greater risk.

Therefore, it is ideal to pay at least 20% of a property’s value as a down payment. Making a substantial down payment reduces one’s loan requirement, thus helping individuals enjoy a lower home loan interest rate.

  • CIBIL score

Lending institutions consider an applicant’s credit score as a primary determinant of his/her creditworthiness. This, in turn, directly determines an applicant’s eligibility and ability to repay this housing loan. Generally, financial institutions consider individuals possessing a 750+ CIBIL score creditworthy, owing to their disciplined repayment history. As a result, such applicants are likely to enjoy lower interest rates. 

Conversely, a low CIBIL score shows poor repayment capacity and may result in higher interest rates. In this regard, it is advisable to always check with a lender’s credit score criteria to avoid loan rejection.

  • Tenor 

Loan repayment tenor plays a significant role in deciding interest rates of long-term financial products like a home loan. This is because lending institutions associate these products with risks like delayed payments and default. As a result, loans with a longer tenor are likely to come with high interest rates, resulting in higher interest outgo.

In this regard, it is important to understand how to reduce home loan tenor and EMI. A great way to do so is by using an home loan EMI calculator before availing loans. A short tenor helps borrowers enjoy lower interest rates and reduces the overall repayment burden. However, note that this will also increase your EMI amount.

  • Income stability

Lending institutions consider job stability a crucial factor when deciding home loan interest rates. This is because housing finance is a long-term financial commitment, and individuals must ensure a stable source of income to make timely repayments.

In this regard, salaried individuals are likely to enjoy lower interest rates, given their regular cash flow ensuring negligible financial distress. On the other hand, lenders consider self-employed individuals or those switching jobs frequently as high-risk borrowers and specify higher interest rates.

  • Property type and location

The location and features of a property significantly affect its value, which, in turn, decides a borrower’s interest rates. For instance, new properties in highly accessible locations with proper amenities are likely to have a high resale value. As a result, these offer a better recovery option for lenders in case of loan default, and they are likely to offer lower interest rates against such home loans. A lower interest rate will also help borrowers avail a lower home loan EMI.

Keeping the above factors in mind is important before choosing the most suitable home loan interest rate, or it may lead to financial stress in future. In case you are already stuck in such a condition with an existing loan, consider it one of the reasons to opt for refinancing. 

Individuals can also check their pre-approved loan offers before applying to avail speedy disbursal. Additionally, check with your lender’s detailed requirements for home loan documents beforehand.

To sum it up, customers should always look for affordable home loan interest rates to maximise their borrowing experience.

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