Home loans have made purchasing a dream house easier than imagined. With a loan tenor extending up to 20 years and a lot of other financial add-ons, a housing loan is much in demand among first-time borrowers looking for a low-risk investment. However, the difference in the housing loan interest rate is something to ponder before signing the dotted line. Different lenders offer different rates depending on several factors. Read on to know about the top 6 factors influencing home loan interest rates.
Top 6 Factors Influencing Housing Loan Interest Rate
Borrowers aiming for the best home loan deals must watch out for the following factors that affect the rates of interest –
- External Benchmark Lending Rate
All banks are compelled to link the External Benchmark Lending Rates (EBLR) to home loan floating interest rates. As per the RBI guidelines, the rate will be set once every three months. This eventually makes the banks revise the floating housing loan interest rate offered on the loans periodically.
- Credit Score
Lending institutions and banks consider the borrower’s credit score (also known as CIBIL score) as one of the prime factors when deciding the housing loan interest rate. It is the score that determines the borrower’s creditworthiness after considering their repayment history and ability to pay off the loan. Typically, a score above 750 is considered good as it indicates a higher chance of the amount getting repaid on time. This prompts the lender into offering a reasonable rate of interest since they see the borrower as a low-risk customer. To avoid scoring low, the borrower must work towards paying bills regularly, clearing credit card dues and debts, or any other existing obligations.
- Principal Amount
Most lenders charge a higher rate of interest for higher home loan amounts. For instance, the interest rates for housing loans of up to INR 30 lakh start from 7.90% p.a. onwards, while the same for a loan amount ranging between INR 30 lakh and 75 lakhs start from 8.15%. In such cases, the borrower must try to cut down the EMI outgo by paying a larger down payment.
- Type of Housing Loan Interest Rate
The type of interest rate chosen also plays a part in determining the actual rates. Most lenders offer two interest options – a fixed rate of interest and floating rate of interest. Fixed-rate of interest, as the name suggests, remains fixed throughout the loan tenor as it is unaffected by market changes. Therefore, borrowers can rest assured that the rates will not rise regardless of the circumstances. A floating rate of interest, on the other hand, is affected by the changes in market trends, and hence, keeps fluctuating throughout the period. This often means that the interest rates are likely to go up, thus affecting the borrower.
- LTV Ratio
Loan-to-Value or LTV ratio refers to the proportion of the property value that the lender offers to pay out. The remaining amount must be paid by the borrower. Based on the LTV caps declared by the RBI, lenders usually offer 75-90% of the cost. However, it must be noted that the higher the LTV, the lower will be the down payment resulting in increased housing loan interest rates and vice versa.
- Borrower’s Profile
Banks and lending institutions usually prefer to offer lower interest rates to borrowers with a stable and reliable source of income as it shows their home loan eligibility and substantiates the likelihood of the loan amount being repaid on time. Usually, preference is given to salaried employees with 3+ years of experience in government/private sector companies or MNCs and earning a minimum salary of INR 25,000/-.
With these major factors in mind, borrowers can work towards earning an affordable housing loan interest rate. It is best to compare various rates offered by various lenders and negotiate a deal that best caters to the needs of both parties.
