Home loans give you an easy source of finance when you want to own your dream home. That is why they are popular among home buyers. However, when you avail home loans, you have to pay interest on the amount of loan availed. This rate of interest is specified by the lender before the loan is sanctioned. This interest rate depends on a lot of factors. If any of the factors are manipulated, the interest rate changes.
Do you know what the factors are? Let’s find out –
Factors influencing home loan interest rates
Your credit score
Ever heard of the term ‘credit score’ or ‘CIBIL score’? Your credit score is a very important parameter when you seek a loan. Lenders allow you loans based on your credit score. It measures your creditworthiness and gives lenders an idea how likely are you going to repay their loan. If your credit score is above 650, it is a good sign. It means that you have a favourable debt history. Home loans are, therefore, allowed to you at lower interest rates. On the contrary, if you have a low credit score, the interest rates would be high since your loan is considered to have a high risk of default.
The location of the property and its value also affects the home loan interest rate. The interest rates differ for properties located in a rural area and for properties located in an urban area. Moreover, the property’s value is also taken into consideration when determining the interest rate of the loan.
It is no secret that home loans have a margin. 75% to 90% of the property’s value is allowed as loan. The rest you have to fund yourself through a down payment. If you make a large down payment, you present a favourable picture to the lenders. Lenders believe that you have substantial funds at hand and require loans for a limited amount only. In such cases, the interest rates are low. Thus, higher the down payments, lower would be the interest rates.
Home loans come with a fixed rate of interest or with a floating rate of interest. The type of interest rates, therefore, also affects the home loan interest rate. Fixed interest rates remain constant throughout the loan tenure while floating interest rates are dynamic and change through the loan tenure. In case of many lenders, the fixed interest rates are higher than floating interest rates. For other lenders the opposite holds true. So, when applying for the loan, check both the fixed and floating interest rates. Either one would be higher than the other.
There are certain other factors on which the rate of interest for Home Loan depends on, which are beyond one’s control. However, it makes sense to have an idea on the same as well. Let us quickly understand those.
Base Rate: is the minimum rate at which the banks are allowed to grant loans to applicants, as set by the Reserve Bank of India or the RBI. This has been especially set by the RBI so as to make the entire scenario of credit industry very transparent. This also ensures that the customers get the lowest, or as close to the lowest rate of interest without being exploited.
MCLR is the Marginal Cost Fund Based Lending Rate, which was introduced by the Government for calculating lending rate. MCLR has replaced base lending rates. They are composed of four main factors which are marginal cost of funds, negative carry on account of cash reserve ratio, tenure premium and the operating cost of the lender. MCLR is reviewed every month or year and is, thus, open to changes.
These factors affect home loan interest rates and should be kept in mind when applying for home loans.
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Tushar singh