Written by- Jaya Pathak
Buying a home is a dream for many individuals. It brings both excitement as well as financial responsibility. A home loan can make your dream come true, but the interest rate can significantly impact your overall financial burden. Even a small difference in the interest rate means that you are paying thousands over the life of the loan.
What is the factor which determine the interest rate on lender offers to you? Is it completely based on your credit score or there are some factors? By listening the key elements, you can make informed decisions, secure a better rate and ultimately save the money.
In this blog, we will break out the essential factors which impacts your home loan interest rate, offering insight into how you can position yourself for the best possible deal.
- 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 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 comes 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 installments. On the contrary, in a longer tenure, you can get the loan amount with higher interest rates but with lower monthly installments. Hence, the longer tenure reduces the monthly payments but you have to 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 interest rate: There are two types of interest rates namely, fixed interest rate and floating interest rate. In a fixed interest rate, the rate remains constant throughout the loan. It provides stability and predictability in the monthly installments. It is generally higher than the floating rates at the time of borrowing. On the contrary, the floating interest rates are the rates which changes based on the market conditions and external factors such as repo rate. It can be lower than fixed interest rates initially but it can fluctuate over the period of time.
It is suitable for the borrowers who are willing to take some risk in exchange for potential savings. You can choose between these two types of interest rates depends on your financial stability and risk taking capacity. - The benchmark rate and market conditions: The interest rate is openly linked to an external benchmark rate including the repo rate, MCLR and RLLR. The report it is set up by the Reserve Bank of India. This rate influences the lending rates across the financial institutions. When the Reserve Bank of India reduces the repo rate, banks generally lower home loan interest rates. The Marginal Cost of funds based Lending Rate (MCLR) is the minimum interest rate at which a bank lends whereas, the Repo Linked Lending Rate (RLLR) is directly linked to the repo rate. It makes home loan rates more dynamic.
The economic factors also affect interest rates. It includes inflation, liquidity and global financial trends. When the inflation rises, central banks may increase interest rates due to excessive borrowing. On the other hand, during the economic downturns, lower interest rates can encourage borrowing. - Types of employment and income stability: Lenders also assesses your employment status and income stability in order 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. - 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.
- Your relationship with the lender: The customers with a good banking history often receive preferential rates. The financial institutions will reward the lawyer customers with lower interest rates and faster approval. If you have a strong relationship with the bank, you can negotiate for better interest rates. You can also check for the pre approval of home loan offers which comes with discounted rates.
- Property location and condition: It is quite surprising but yes the property itself can influence your loan interest rates. If you have a property which is located in prime areas then you can receive the loan amount at lower interest rates as it is considered as less risky investments. If you have some under construction property, the loan amount that interest rate might come with slightly higher interest rate due to the uncertainty beating it if you have a property simple condition, it signifies that it has a lower market value. In this condition,
you will receive the loan amount with higher interest rate. In order to receive a small interest rate, you can choose a property which is well developed and high in demand. You can also opt for the project root by reputed financial institutions. - Government schemes and policies: The schemes and policies also impact the interest rate. There are various schemes launched by the Government of India such as Pradhan Mantri Awas Yojana which offers first time home buyers with lower income and middle income groups home at subsidized rate. You can stay updated by the latest government schemes and eligibility criteria. You can also compare certain offers vampire and offers loan amount with slightly lower rates.
Conclusion
Loan interest rate is not just any random number. It denotes multiple financial factors, from creditworthiness to current market trends and lender policies. There are some aspects like repo rates and economic conditions which are beyond your control. But the factors such as your credit score, loan tenure and down payment are the factors which are under your control. By understanding the crucial factors, you can make strategic decisions so that you can secure the best possible home loan interest rate. You can negotiate for better terms and ensure that you are financially prepared for this commitment.
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