Main Factors That Affect Your Home Loan Interest Rate


 
Home loan interest rate usually ranges between 8% and 12%. Being collateralize, loan rates are comparatively lower than that of unsecured loans. 
 
Even then, borrowers will end up paying a significant amount on interest owing to the large loan amount and prolonged tenor. A slightly high interest rate for such high-value loans can also make EMIs quite expensive.

Hence, borrowers need to seek for the lowest rates to save on interest and make their monthly installments affordable. To do so, they need to know the factors that affect home loan interest rates.

These include –

LTV and down-payment

Loan to value (LTV) is the ratio between the home loan amount and current market value of the property. It usually depends on factors like an applicant’s income and occupation, property valuation, etc.

However, the LTV ceiling is set by the RBI basis the principal –
  • 80% to 90% - up to Rs.30 lakh.
  • Up to 80% - Between Rs.30 lakh and up to Rs.75 lakh.
  • Up to 75% - Rs.75 lakh and above.
The margin or down-payment has to be paid by a home buyer since the LTV can never be 100%.

Applicants can make a higher down payment to lower the LTV. Doing so reduces a lender’s risk, which can further decrease the home loan interest rate.

CIBIL score of the applicant

CIBIL score also plays a critical role for the approval of a home loan even though these are secured. The ideal CIBIL score for a home loan is 750.

Lenders not only give more preference to customers holding a high score but may also offer lower interest rates.

Income and occupation of the customer

Income and occupation of a borrower can also be one of the contributing factors that affect the loan interest rate. A high income as well as holding a respected position in a renowned company or heading a successful business lowers the lending risk of financing institutions. Hence, they may offer lower rates.

Age of the applicant

Age of an applicant may also impact the interest rates. It is also one of the factors that affect the home loan eligibility. Usually, applicants have to be aged between 23 and 70 years to apply.

Those in their early age will have a better chance of repaying without defaulting since they have aplenty years of employment.

The same may not be the case for those nearing their retirement. Hence, the home loan interest rate for such individuals may be high. Additionally, they may not be able to secure a longer tenor, unlike those aged lesser.

Debt-to-income ratio of the borrower

Debt-to-income ratio or Fixed Obligation to Income Ratio (FOIR) is the ratio between the fixed monthly expenses and income of an individual. The ideal ratio that lenders prefer is 50% or lower.

A low ratio ensures that a borrower can pay his/her loan EMIs comfortably without defaulting. It may also lead to affordable interest rates.

Loan tenor

The loan tenor can impact interest rates in several ways –
  • Lenders may offer a lower rate for those opting for a short tenor. Shorter tenors reduce the risk associated with a loan considerably as the repayment is not stretched for a longer period. 
  • However, some financial institutions may increase the rate for shorter tenors as it lowers the accrued interest, which is their primary source of income.

Hence, it is recommended that applicants discuss the impact of interest rates on their loan tenor with the lender.

In any condition, borrowers must try and secure a shorter tenor as it reduces the overall interest and cost of loan.

For example, consider a home loan of Rs.45 lakh at an 11% rate of interest. Here, the EMIs and cost of loan for tenors of 15 years and 20 years will be –
  • EMIs
  1. 15 years – Rs.51,147.
  2. 20 years – Rs.46,448.
  • Cost of loan
  1. 15 years – Rs.92.06 lakh.
  2. 20 years – Rs.1.15 crore.
Individuals can use a housing loan EMI calculator to determine the right tenor and also assess the monthly installments.

Characteristics of the property

The location, future valuation, and other aspects of a property can also be a factor that affects the home loan rates. Lenders may offer lower rates in case of houses that are in high demand. In such cases, recovering the lost debt in case of a default may be easier for a lender.

Borrowers can claim deductions using the home loan tax benefit calculator and save significantly even if they cannot secure the lowest rates. Under Section 24(b), they can avail tax exemptions of up to Rs.2 lakh on the interest paid.

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