Written By – Jaya Pathak
Imagine that you have just found your dream home. It has a spacious kitchen and the perfect backyard. Then suddenly the reality hits. If you do not secure a competitive interest, then the cost of financing your dream can add up significantly over time. Home loan is one of the crucial financial commitments you will ever make. A slight difference in interest rates can convert into thousands of rupees in savings over the life of your loan. Whether you are a first-time buyer or refinancing an existing mortgage, obtaining a better interest rate can help you to manage the finances more effectively and you can build wealth over the period.
But the question here arises that how can you secure the best interest rates on your home loan? In this blog, we will discuss how you can obtain a better interest rate on a home loan.
Understanding interest rates on home loans
The interest rate you receive on your loan is influenced by various factors including-
- Credit score: Your credit score is one of the crucial factors which determines home loan interest rates. Credit score is often used by lenders as an indication of your financial liability. If you have a high credit score, you can get the loan with lower interest rates. On the contrary, the lower credit score reflects the higher risk and hence the results in delay or rejection of your loan. Lenders see your credit score as an indication of your potential to repay the loan amount of time. If you have a very good credit score, you can get the loan amount with lower interest rates.
On the contrary, the lower credit score can result in higher interest rates. You can improve your credit score by paying the bills and the monthly instalments on time. You can maintain a low credit utilization ratio. You can also avoid frequent loan applications which can lower your credit score. You could check the credit report regularly for any errors and inaccuracies. - Loan to value ratio: loan to value ratio is basically the proportion of the value of the property which the lenders finances through the loan. If you have a lower loan to value ratio, it means that you are a lower risk for the lender. It can lead to a better interest rate. For example, if you have a house which costs around rupees 50,00,000 and you have taken a loan of 40 Lac then you have the loan to value ratio of 80%. If you only take a loan of rupees 30,00,000, the ratio drops to 60%, which can help you to secure a lower interest rate. You can reduce the loan to value ratio by paying a higher down payment. You can also choose a property within your budget to avoid over borrowing.
- Debt to income ratio: This ratio is evaluated by the lenders to determine if you can manage the additional debt. It is calculated by dividing the total monthly debt payments by gross monthly income. This lower debt to income ratio enhances the chance of approval of loan with lower interest rates. On the contrary, a higher ratio denotes financial strain which may lead to higher interest rate or even loan rejection.
- Loan amount and tenure: The amount which you borrow from the lender and the duration of your loan really affect your interest rates. Small loan amount comes with lower interest rates, while the larger loans come with higher interest rates due to the increased risk. For a shorter tenure, you can get the loan amount with lower interest rates but the lenders will charge you a higher monthly instalments. On the contrary, in a longer tenure, you can get the loan amount with higher interest rates but with lower monthly instalments. Hence, the longer tenure reduces the monthly payments, but you must pay more interest over the period of time. A shorter tenure is quite affordable as you can save the money for the longer run.
- Types of employment and income stability: Lenders also assesses your employment status and income stability to determine your repayment ability. If you have a steady source of income, the chances of securing a loan that loaded restraint is quite high. If you are a salaried employee who works in government or other reputed private companies, you are seen as lower risk. If you are a self-employed individual, you might face slightly higher interest rates because of the income variability until and unless you can demonstrate a strong financial stability.
If you are a professionals like doctor or Chartered Accountant, you can often receive the minimum amount with favorable interest rates as they have a stable source of income. You can maintain a stable job and avoid frequent job switches before applying for the home loan. You can also show a steady increase in income over the time span. You can also keep the financial records and bank statements well documented.
Steps to obtain a better interest rate
- You can improve your credit score to obtain a better interest rate. A higher credit score often denotes lower interest rates. To improve your credit score, you can pay your bills on time, reduce your credit utilization avoid opening new credit lines before buying, checking your credit report, maintaining a good credit mix.
- The down payment factor also affects your interest rate. A larger down payment indicates that you are at lower risk, and you can get loan in better terms.
- You can compare various lenders and financial institutions who will provide you loan at better interest rate. You can look at traditional banks, credit unions, mortgage brokers, online lenders and government backed lending programs. By comparing the interest rates, you can negotiate accordingly.
- Interest rates varies as per difference in the type of loans which you are taking. In a fixed rate loan, higher interest rates may be charged initially whereas a variable rate loan starts with lower interest rate, but it may fluctuate over the period of time. If you are eligible for government loans, then on lower down payment is required with minimal interest rates.
- You can lower your debt-to-income ratio. This ratio is basically the percentage of your monthly income which goes toward debt payment. If you lower the ratio, it will attract the lender. You can reduce the debt-to-income ratio by paying off all the existing loans, avoiding large purchases before applying for the loan, increasing the income through job advancements, consolidating high interest debt into interest options.
What are the tips to improve home loan approval chances?
- Maintain a good credit score. If your credit score is above 750, it increases the chances of your loan approval. It also helps you to secure better interest rates. The self-employed individuals must clear their existing debts avoid any delay in approval.
- Income tax returns must be filed consistently for at least two or three years prior to applying for home loan. It will establish a steady income record, making lenders more confident in loan approval.
- A healthy bank transaction must be maintained. The self-employed individual should regularly deposit to bank and manages his finances. It will reflect a stable source of income which will contribute to the chances of approval of loan.
- Individual must keep his or her business financials organized. The balance sheets audited financial statements and many more validate income stability.
- The self-employed individual might consider a co applicant who might be his or her spouse or family member with a stable source of income. It can improve loan eligibility and reduce the financial risk in lender’s eyes.
- You must compare different lenders including banks and other financial institutions. Choosing the right lender will help you in selecting the most suitable home loan option with lower interest rates and flexible terms.
Conclusion
In a nutshell, you can save thousands of rupees over time by securing home loan with lower interest rate. It will make the journey of buying a home smoother and affordable. By considering the above factors, you can increase the chances of securing home loan at best possible rate. With the assimilation of right strategy, you can turn your dream into reality.
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