Important Points Which Affect Your Home Loan Interest Rate in India
Moving into one’s own home is a personal and financial dream for many of us. Many people work towards this goal for years, saving up, investing in instruments with high returns, and working multiple jobs. However, as property prices in India soar with each passing day, it is not easy for everyone to pay for their house out of their own pockets. This doesn’t have to be a dead-end for their property dreams, however. Home loan in India are extremely common and easy to avail of. These come with good rates of interest, useful EMI options and flexible payment tenors. While this is an attractive and relatively safe option, it is still important to understand home loans properly before availing of one. The interest rate on your home loan is the make-or-break factor when it comes to repayment in the long run. This makes it crucial for everyone to familiarize themselves with factors that could affect their housing loan interest rate in India, positively or negatively.
Here are the most common factors that affect your home loan interest rate.
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Type of Home Loan Rate
Home loans usually tend to have a larger principal amount because of the high property value. If you take a home loan, you might have preferences on how you want your interest to be charged. You can go for two options – fixed-rate loans and floating-rate loans. Under the fixed-rate regime, your interest rate remains unaffected by market fluctuations and macroeconomic conditions. Floating rates, on the other hand, involve some uncertainty because the interest rate could increase from time to time, depending on the market. Fixed-rate loans, however, tend to be slightly higher than their counterparts because of the certainty involved. They also have prepayment penalties in the case of a default. If you have a floating rate home loan, you can enjoy the benefits of a sudden repo rate cut or a policy rate cut. This loan type does not impose prepayment penalties either. So, before you finalize on an interest-rate regime, study the market, understand its trends and choose the rate type that suits you best.
2. CIBIL Score for Home Loan
The CIBIL score is essentially a financial metric of a person’s creditworthiness; that is, their ability to repay a loan. This is an important indicator checked by banks while analyzing a loan applicant’s financial profile. This score ranges between 300 and 900, and the ideal CIBIL score for a home loan is considered to be above 750. Working on your CIBIL score in the short-term can-do wonders for your loan prospects in the long run. Ensure that you work on your credit report, repay your short-term loans on time, fulfil your EMI payments and limit your credit card expenditure. A high CIBIL score, along with an indicator of financial stability – government jobs or reputed private jobs – are considered lucrative grounds for obtaining a good home loan interest rate.
3. Value of the Property
The property for which the loan is being availed is also factored into the home loan interest rate calculation. If your property is located in a good neighbourhood, is connected to amenities around it and is relatively new, it will hold good resale value. On the other hand, properties in remote locations or slightly older properties do not offer much resale potential. A property that promises high resale value will have a lower interest rate as compared to one with a lower resale value.
4. Loan-to-Value (LTV) Ratio
LTV Ratio is the percentage of the value of the property that is financed through the loan. If your loan amount is large, the interest rate that it attracts will also be high. When you make a significant down payment, it will reduce the amount of loan that has to be accrued, thereby reducing the interest rate. So, when you reduce home loan EMI, you stand a chance of attracting a better rate of interest. The loan tenor similarly impacts the interest rate. A longer tenor usually attracts higher rates, while a shorter tenor could help you secure a lower rate.
5. MCLR Rates
MCLR rates are the Marginal Cost of fund-based Lending Rates. Simply put, it is the minimum interest rate that a bank can levy. There is an annual date at which the bank reviews its MCLR rate conditional on several other factors such as the Cash Reserve Ratio (CRR) and the bank’s operating costs. This is the time when the bank reconsiders existing borrowers’ interest rates as well. Therefore, changes in the MCLR rate can lead to changes in your home loan interest rate as well.
Home loans are major financial decisions that require planning and structure. Understanding your housing loan eligibility criteria can prove to be useful in saving money and repaying your loan faster. Before you embark on the journey of your dream home, familiarize yourself with these aspects of your home loan interest rate.
