The Major Factors That Affect Your Home Loan Interest Rate

According to a recent study, the housing loan segment is expected to register a 22% CAGR between 2021 and 2026. This estimate arrives amid financial institutions offering competitive interest rates and ramping up their efforts to make housing loans more accessible to individuals.

It is therefore important that prospective borrowers be mindful of the factors that can influence home loan interest rate that they are now eligible for. Recognising these points and undertaking measures to build on them can help you to secure a more reasonable rate. This can go a long way into easing the repayment burden since even a marginal decrease in interest rate can save you lakhs.

Here are the factors that influence your housing loan interest rates –

Location of the property
The location of the property you are planning to buy is a significant determinant of home loan rates. A house or a flat in an up-and-coming locality with several amenities and ready access to transportation facilities is likely to invite lower rates.

On the other hand, lenders are likely to charge a higher interest rate for a property in a location with poor connectivity and fewer amenities since such a property will have a lower resale value compared to the former one.

This factor reduces the risk a lending institution assumes by extending a home loan. Hence, you have chances to secure lower interest rates if the property you are eying is in a prominent neighbourhood. Ideally, properties at premium locations are pre-sanctioned by many reputed lenders.

As such, availing loans for the purchase of such properties at attractive interest rates becomes easier.

Loan quantum
Choosing the loan amount smartly is one of the ways of getting a better home loan interest rate. As a general rule of thumb, it’s wise to pay at least 20% of your property’s value as a down payment. The loan amount can impact the interest rate you are charged. A higher loan implies a more significant risk to the lending institution and vice versa.

Thus, if you want to secure lower home loan rates, it’s wise to make a more sizeable down payment. A moderate loan amount will also help ensure lower EMIs and overall reduced interest outlay. Thus, consider saving up to make a substantial down payment.

CIBIL score
Your credit score determines the home loan eligibility and the interest rate at which you will be servicing it. It denotes your creditworthiness and is a measure of the risk the financial institution bears by disbursing the amount. Thus, it’s vital to know the best credit score for a home loan and how to improve yours. A low score can make the lender wary of your repayment capabilities, leading them to levy higher interest rates. Conversely, a higher score positions you more advantageously.

To put it in perspective, suppose a financial institution levies interest in the range of 7%-15%. An individual with a score of 750 may be offered financing at 7.5%-8%. If their score is in the range of 800–900, they may even secure a loan at the lowest rates. On the other hand, an individual with a score between 600–700 may incur interest rates in the range of 10%-15%. It’s wise to inquire about credit score requirements of a specific lending institution beforehand.

Type of interest rate
Financial institutions offer two types of interest rates, namely, floating and fixed. The former fluctuates based on changing base rate. The latter remains unchanged throughout the tenor. Usually, floating interest rates are lower than fixed rates by 1%-2%. Note that floating rate revisions do not impact the instalment you pay but the tenor.

Hence, fixed-rate is a suitable option if you prefer more certainty regarding the repayment period. On the other hand, floating-rate lets you benefit from base rate decrease and enjoy lower interest charges initially. You can use an online home loan EMI calculator to reckon which type of interest rate you will be more comfortable with.

Income stability
Obtaining a housing loan is a significant financial commitment. The tenor can extend up to 240 months and financial institutions need to ensure you can service instalments for that period sans hiccups. Your income stability is vital to that end.

A lending institution is likely to levy a lower home loan interest rate on salaried individuals, especially ones employed in the public sector or reputed private companies.

Individuals eligible for pre-approved offers from lenders may also enjoy some leniency concerning the interest rate. These also expedite the application process and are available on a range of financing options, including a home loan and a loan against property. You can check your pre-approved offer with just your name and mobile number.

Nonetheless, you shall be judicious concerning the repayment tenure besides ensuring low home loan interest rates. You can alleviate the instalment burden with a prolonged tenor but note that interest outgo will be significant in that case. Thus, weigh your priorities before you obtain a home loan.

If you are thinking of a home loan, consider the one offered by Bajaj Housing Finance Limited. The housing finance company offers financing of up to Rs.3.5 crore at interest rates starting 6.90%*. In fact, the lender even offers an easy balance transfer facility – so you can consider switching your existing home loan and use the large top up on offer.

Disclaimer: This content is distributed by Bajaj Housing Finance Ltd. No TNIE Group journalist is involved in the creation of this content.