In the long run, home loans can have a significant impact on your financial health and even your quality of life. The lending terms you agree to will determine whether you are financially comfortable or distressed for many years to come. According to a recent study, the home loan market is expected to grow at a 22% CAGR between 2021-2026. This estimate comes as financial institutions offer attractive interest rates and increase their efforts to make house loans more accessible to individuals.
As a result, prospective borrowers should be aware of the factors that can influence the home loan interest rate that they are currently eligible for. Finding the correct EMI amount that is both manageable and ensures early repayment is critical to borrowing wisely. The house loan rate of interest is the most important aspect in determining financing terms. While other factors like the economy, inflation, and your income are beyond your control, the interest rate is something you can influence to some extent.
Lenders are permitted to impose a spread or risk premium in the home loan interest rate to account for your risk profile. In short, the riskier you are as a borrower. The higher the interest rate lenders may have to charge to compensate for the loan risk.
The MCLR is a lending rate at which lenders provide loans. Financial organisations previously relied on the base rate. These loans have a reset clause that occurs at predetermined periods, which can be six or twelve months. Any changes in the MCLR during this time will affect your interest rate. This means that your interest rate will fluctuate slightly throughout the term. However, by adhering to a predetermined, high rate of interest, it ensures that you do not wind up overpaying.
Location of the Property
The location of the property one intends to purchase has a considerable impact on home loan rates. A house or a flat in a growing neighbourhood with numerous amenities and easy access to transportation is likely to attract reduced prices. This aspect lowers the risk that a lending institution takes on by granting a home loan.
Tenure of the Loan
The loan tenure is the length of time that the consumer must repay the loan. A short loan tenure indicates that the interest rate and overall costs of the home loan are low, but the monthly payback amount is high. Long-term loans have significant interest payments but modest monthly payments.
Type of Interest
When it comes to interest rate charges, home loans come in three varieties: floating, fixed, and blended interest rate home loans. While floating rate and fixed rate home loans are self-explanatory. Mixed rate home loans have fixed interest rates for a specified period of time before switching to fluctuating interest rates. To compensate
for the loss of interest income, lenders typically charge higher interest rates on fixed and mixed rate loan alternatives, owing to the higher risk exposure.
Loan-to-Value (LTV) Ratio
The loan-to-value (LTV) ratio is the percentage of the property’s value that you want to finance with a house loan. Due to the increased risk of credit, a greater ratio draws a higher interest rate. Paying a large down payment ahead can lower the LTV ratio and, as a result, the interest rate.
Credit Score (CIBIL score)
Credit score has a significant impact on the interest rate one pays. It assesses creditworthiness and influences the lender’s confidence in capacity to repay a loan. While a low credit score may cause the lender to charge a higher interest rate. A high credit score gives more negotiating power when it comes to the interest rate.
Focusing on these factors and completing detailed research on lenders will assist one in selecting a good property and obtaining a more inexpensive house loan that one can comfortably repay.