A home loan allows you to purchase your ideal home right now. The Equated Monthly Instalments (EMI) that you will have to pay determine the loan’s affordability. EMIs allow you to repay the principal and interest in a method that does not put additional strain on your monthly budget. However, the interest rate will have a significant impact on this. A number of factors, that differ from one lender to another, influence the interest rate on your housing loan application. Some of these variables are constant (such the RBI’s repo rate or the bank’s MCLR rate), while others are variable.
Factors that Influence your Home Loan Interest Rate
1. MCLR Rates
The Marginal Cost of Funds-based Lending Rate (MCLR) is an acronym for Marginal Cost of Funds-based Lending Rate. This is the lowest interest rate at which a bank can lend. The operational cost, marginal cost of funds, Cash Reserve Ratio (CRR) and any negative carry on it, as well as the tenor premium, all play a role. The MCLR has an annual reset date when banks evaluate the rate for current home loan borrowers. Even if the MCLR changes between the reset date and the next year’s reset date, the MCLR on the reset date stays valid until the next year’s reset date. This means that depending on how the MCLR rate changes, your housing loan interest rate may rise or fall.
2. Loan-to-Value (LTV) Ratio
The percentage of a property’s worth that can be funded through a loan is referred to as the LTV. Because it is a higher credit risk, a larger loan gets a higher interest rate. Putting down a higher down payment can assist reduce the size of the loan, which will lower the interest rates.
3. Job Profile
Individuals with a steady source of money are regarded low-risk, whilst those with an inconsistent source of income are deemed high-risk. Those having a stable income, such as salaried professionals, PSU and government personnel, and those working in prominent private sector organisations, are consequently provided lower interest rates. Among the self-employed, doctors and chartered accountants are considered low-risk.
4. Loan Tenure
Loan tenure plays a major role in determining the interest rate on your home loan application. Banks consider your loan tenure whenever you apply for a home loan. Home loans having a shorter term (even if the EMIs are higher) have a lower interest rate than loans with a longer term (which will have lower EMIs but a higher interest rate).
5. Credit Score
Your credit score significantly affects the interest rates on your home loan. Your credit score is a reflection of your trustworthiness, payback history, and financial discipline or habits. A low credit score indicates a high credit risk, prompting lenders to demand a higher interest rate to compensate for their risks. A higher credit score, on the other hand, indicates that the person is a smaller credit risk, making lenders more inclined to give lower interest rates.
6. Property Location
The interest rates you are charged will be influenced by the location of the property you are contemplating. The resale value of a home in a neighbourhood with good amenities and connectivity will be higher. Homes in less desirable neighbourhoods may be less expensive, but they will have a lower resale value. Newer properties are also thought to be more valuable, whereas older houses are thought to have a lesser resale value. Lenders see homes with a high resale value as a profitable investment and charge lower interest rates for them. The housing loan Interest rate will be higher for residences with a lower resale value.
These are the factors that influence the interest rates that banks offer on your home loan application. It is advisable to learn about these factors before applying for a housing loan.