While a home loan makes purchasing a home feasible, its affordability depends majorly on the home loan interest rate offered to you. Home loan rates depend on various factors and are not flat across the board. While they are influenced by the market and a lender’s policies, your financial profile and the particulars of the property being mortgaged also impact the interest rate you get. For instance, a good CIBIL score and a high property resale value give you the room to negotiate for lower home loan rates.
To understand more, here are 5 factors that affect home loan interest rates.
A good credit score can help you secure low home loan interest rates
Lenders, upon receiving your home loan application, consult your credit score to assess your creditworthiness and gauge your repayment capability. An ideal credit score, 750 or above, speaks of your competence in handling debt. This translates to economical home loan rates. Conversely, low credit scores indicate varying levels of risk and to mitigate this, lenders tend to charge a premium, which inflates the cost of borrowing.
The benchmarking system used determines how resets affect repayment
In case you have a floating interest rate home loan, your housing loan rate will be tied to an internal or external benchmark. If your loan is under the MCLR regime, your loan rate will be reset once every 6 or 12 months. However, borrowers complain that lenders employing the MCLR as a benchmark are quick to increase rates when the repo rate rises but slow to transmit benefits when the repo rate dips. In contrast, if your loan is linked to the repo rate, an external benchmark, resets must be done every 3 months and here, you can expect greater transparency in transmission of repo rate changes.
The location and market value of your property impacts the rate
Location directly affects the value of your home and since your lender is entitled to a lien on the property, location is important to home loans. If your property is in an upcoming locality that is well-connected and has the best of amenities, the market value of your home increases, raising its resale value. Therefore, for such a property, lenders will readily offer competitive home loan rates. Conversely, if the house you are buying is in an isolated location, without proper amenities, you can expect lenders to offer you a home loan with a high-interest rate.
Lack of stable employment and income can cause rates to rise
Apart from checking your credit score, lenders look for a good balance between your current income and the total debt you will be servicing through repayment. Naturally, a regular stream of income is a must if you are to gain approval. However, lenders also look for stability as you would have to make repayment over a long tenor. If you have a stable, high-paying job as a government employee or in a reputed private organisation, lenders know that your salary is stable and you will be able to repay the loan. This can translate to a more relaxed rate of interest.
The length of the tenor impacts housing loan interest rates in multiple ways
You would expect loans with short tenors to attract low-interest rates as lenders would be confident of your financial profile not changing in the short-term. However, this is not always the case, and especially so when you apply for a high loan amount. When you do so, a short tenor increases the risk of default as your resultant EMIs are high. In such a case, lenders may charge you a high-interest rate as a measure of caution.
Now that you know about the factors that influence your home loan interest rate, keep them in mind when on a lookout for a home loan. Since different lenders perceive risk differently, obtaining a cost-effective loan also means picking the right lender. For instance, when applying for the Bajaj Housing Finance Limited Home Loan, you get finance up to Rs.3.5 crore at an attractive rate of interest.
You also get PMAY benefits up to Rs.2.67 lakh and coupled with the annual home loan interest tax benefit, this makes becoming a homeowner more affordable. Here, you can repay your loan over a maximum of 30 years and can use the home loan interest calculator to forecast your monthly debt outgo. To get started, all you need to do is fill an online application form!