In the Financial Year 2019-2020, the home loan sector flourished with a growth rate of 16%. India, being one of the largest housing credit markets in the world, has shown significant promise in this fiscal year as well.
A home loan is a secured credit facility with repayment tenors as long as 20 years. It is a long-term financial commitment, and due consideration on your part is mandatory when proceeding with a housing credit. Home loan interest rates are the primary determinant of payable EMIs.
Factors Affecting Housing Loan Rates
Your installment amounts are largely determined by the applicable interest rate on your home loan. Any minute reduction or increase in such a rate can affect your EMIs. As a consequence, it will also affect your financial standing and can either improve your savings or dent your financial capacity. You can calculate your installment amount using a loan EMI calculator.
On that account, you should consider a few factors which will allow you to break any change in the interest rate your way.
Financial institutions take into account several factors that impact your home loan interest rate. These components are discussed below –
A credit score is a quantitative representation of your quality as a borrower. It is one of the first attributes which the lender checks when a certain individual applies for a loan. The credit score ranges from 300-900. It accounts for your credit history, repayment habits, etc. Lenders consider this as a basis to determine the home loan interest rates applicable for any specific borrower.
In essence, credit score shares an inverse relationship with your home loan interest rates. The higher your score, the lower will be the interest rate. Thereby, you should consider your CIBIL score when applying for a housing loan. Note that, even if you are not offered the lowest possible rates of interest, you are sure to be provided with additional repayment-friendly features instead.
Interest rate type
There are two types of interest rates that financial institutions provide – fixed and floating. Fixed interest rates remain constant throughout a repayment tenor unless mentioned otherwise in the loan agreement.
Floating interest rates, on the other hand, vary with market fluctuations and conditions. According to an RBI mandate, all financial institutions need to link their interest rates with external benchmarks such as repo rates. Fixed rates are usually higher than floating rates. In regards to how to choose between floating and a fixed rate of interest, you should duly assess your current financial capacity and prospects.
It refers to the percentage of the property value which you receive as a home loan. According to RBI specifications, the LTV ratio can be within 80% – 90% in the case of property valuations up to Rs. 30 Lakh.
LTV ratio is also directly proportional to a housing loan interest rate. A higher LTV means a higher interest rate and vice versa. If you can afford substantial down payment when purchasing or constructing a house, you can decide to opt for a lower LTV. It will reduce your interest rate and consequently, the installments.
It is the rate at which the RBI advances credit facilities to other financial institutions. A lower repo rate suggests a lower rate of interest on loans. Subsequently, consider the prevalent repo rate when you are availing a home loan. For instance, the current repo rate stands at 4.00%, which is the lowest since 2010. You can avail a Bajaj home loan at a much lower rate owing to a low repo rate. Several lenders additionally offer no charge prepayment and foreclosure, property dossier, etc. and numerous other add-ons to help borrowers with their property purchase.
Income or repayment capability
Your source of income is also an essential factor that lenders account for when determining your home loan interest rates. For instance, a borrower with a steady source of income is less likely to default on installments compared to an individual with varying income. Thereby, salaried individuals are likely to attract lower rates of interest rates.
When you are applying for a home loan, you should also check whether you are eligible for government initiatives such as PMAY or any home loan interest tax benefits which will reduce your total financial burden. Make sure you have a complete idea about such additional pointers before applying for a long term financial product such as a home loan.