With a home loan, it is possible for you to meet your dream of owning a home. Home loan affordability depends upon the EMI (equated monthly instalment) that you must bear. EMIs assist you to repay the interest and principal component in smaller instalments without stressing your monthly budget. However, how much you can reduce your EMI depends upon your home loan interest rate. There are various factors that impact your home loan rate, which often differs from one lender to another. Read on to know the major factors impacting housing loan interest rate:
- Interest rate type
You can select amongst floating, mixed, and fixed interest rates. Floating rate is volatile and changes with change in RBI’s repo rate. If the repo rate increases, the home loan interest rate rises. Likewise, if the repo rate falls, the home loan rate drops. In the case of fixed rate, home loan rate remains the same during the entire repayment tenure. Mixed rate loan begins with a fixed rate for a specific period and later switches to floating rate. While mixed rate is offered by very few, floating and fixed ratesare offered by many lenders. Of both options, many borrowers usually consider opting for a fixed rate option as it eliminates the possibility of interest rate volatility. However, lenders charge higher fixed loan rate than floating rate to forgo the higher credit rate risk on floating rate home loans.
- Loan to value (LTV) ratio
LTV is the percentage of property value funded through home loan. Bigger loan quantum attracts higher interest rate as it comes with a higher credit risk. Putting a higher down payment can assist lower your loan quantum. This, in turn, allows lenders to charge a lower interest rate on home loans due to reduction in their credit risk.
- Credit score
It is a crucial parameter that impacts your home loan rate. Your credit score indicates your financial discipline, repayment history and your credibility. A lower score portrays you as a risky applicant, which makes lenders charge higher housing loan interest rates to cover their higher credit risk. On the contrary, a higher credit score portrays you as a suitable applicant for a loan. As an outcome, lenders usually charge a lower interest rate.
- Job profile
Lenders generally prefer lending if you have a stable income source. As a result, many home loan lenders target specific customer groups with a stable income source by providing loans at a lower interest rate. Generally, salaried groups are offered a lower interest rate than self-employed ones. Amongst salaried, government and PSU (public sector unit) employees are highly preferred while amongst the self-employed category, chartered accountants and doctors are considered the least risky.
Above mentioned are major factors that impact your home loan interest rate. Thus, before you apply for a home loan, ensure to keep all these parameters in mind, as it will assist you to avail the best value loan as per your requirements and budget.