How are Home Loan interest rates determined?
Home Loans have gradually become essential to home buying over the past two decades. Easy Home Loan sanctions and property verifications enable homebuyers to own their dream house. A wide range of lenders offers them attractive options at varying interest rates. After all, a home is where the heart resides.
The Home Loan interest rates depend on several factors playing a key role in selecting the bank. They further decide the EMI amount and, in turn, the affordability for the applicant. Though most remain fixed, variable ones may change the borrowing’s interest rate and equated monthly instalment amount. Consider these factors for the changes:
The repayment period for a Housing Loanalso affects the interest and EMI amount. For example, borrowing for a shorter tenure has a lower interest rate, even if the monthly instalment is higher than the one with a longer term. You can opt for the repayment duration basis your financial capacity and convenience.
A credit score is among the prominent factors for disbursing the Home Loan and fixing the interest rate. It records your repayment schedule, creditworthiness, and financial discipline. A lower score attracts a higher interest and vice-versa. A good 700 to 800 credit score leads to the best deals.
The Reserve Bank of India regularly releases repo rates for banks that benchmark applicable interest rates on lending. It also allows different banks to offer varying interest rates to their customers, depending on credit score, Loan duration, salary, down payment, interest type, etc.
Applicant’s job profile
Individuals with consistent job profiles or steady income come under the low-risk category compared to those with inconsistent jobs. Low-risk home buyers like government and PSU employees, charted accountants, doctors, salaried professionals, or people working in reputed private sectors get lower Home Loan interest rates.
The Loan-to-Value ratio is the percentage of total property value financed through a Home Loan. If the LTV is higher, the interest rate will be higher. A higher amount is risky. If you pay more down payment, the Loan’s disbursal amount and subsequent interest rate will be lower.
Banks offer varying interest rates for Home Loans, like floating, fixed, and mixed options. The fixed interest rate does not change throughout the tenure, while the floating rate varies with changes in the repo rate released by the RBI. The mixed interest rate remains fixed for a limited period and then converted to a floating interest rate.
Though each bank offers a clear guideline on interest rate calculation and disbursal of the sought amount, homebuyers can always be well-informed about their creditworthiness to avail of the best rates on the Loan.