Home loans are the easiest way to finance your dream home. The government, to encourage people to invest in homes of their own, tries its best to keep home loan interest rates within the affordable range. This has made home loans more accessible for common people. Borrowers can avail of low interest rate on home loans once they meet all the home loan eligibility conditions. But the question here is, how to avail of low interest rates on a home loan or what factors influence the home loan interest rates? Read on to know more on this topic.
Factors Influencing Home Loan Interest Rates
As a borrower, one would primarily look for lenders offering home loans at lower interest rates. But did you know that interest rates on home loans depend on certain factors, which may lead to a high or low interest rate? Here are a few key factors that affect home loan interest rates:
Loan Value
The loan value is a major factor that influences the home loan interest rates. A higher loan amount means higher risk for the lender and hence lenders charge a higher interest rate on high-valued loans. A lower loan amount attracts a lower interest rate. Thus, a higher down payment can be beneficial in the case of high-value home loans. Borrowers paying a higher down payment can enjoy the benefits of a lower home loan interest rate and smaller EMIs. A home loan calculator can help to calculate and know the amount which would be best suitable for you and offer a comfortable EMI option.
Type of Interest Rate
There are mainly two types of interest rates that banks or lending institutions offer for home loans: floating and fixed interest rates. The floating interest rate changes or fluctuates with the market. Whereas the fixed interest rate remains fixed for the months as mentioned in the loan agreement. It is important to understand that in most cases floating rates work out cheaper and are lower than fixed rates in the long run, but it is completely up to the borrower to decide. So, the interest rate you get offered will also depend on the type of interest rate you choose.
CIBIL Score
Banks, before approving a home loan, consider a few important factors. The credit score of the borrower is one such important factor. They consider individuals possessing a high CIBIL Score (750 and above) and having a disciplined repayment history, creditworthy. These borrowers are likely to enjoy lower home loan interest rates as the banks find them low-risk borrowers. On the other hand, an applicant with a low CIBIL score indicates poor repayment capacity and thus may be charged higher interest rates for the loan.
Loan Tenor
Once again the loan repayment tenor plays an important role in deciding the interest rate on any loan. Home loans stretched over a longer tenor may provide the borrower with lower EMI amount but come with higher interest rates as chances of delayed payments and defaults are very high in such cases. A short loan tenor means lower risk for the lender and helps borrowers enjoy lower interest rates. So, a borrower must keep this in mind while deciding the maximum tenure for home loan to get the best loan value within their budget and requirement.
Income Stability
The job profile of the borrower is another crucial factor that affects the home loan interest rates. Home loans are a long-term financial commitment and borrowers must have a stable source of income to make timely repayments. Individuals who have a stable source of income are considered low risk while those who have an unstable income are considered high-risk borrowers. The banks offer lower home loan interest rates to borrowers with a stable income, like salaried professionals, Public Sector Unit and government employees, and employees working in private sector firms. Some self-employed professionals like Doctors and CAs may also be considered low-risk and may get loans at low interest rates.
Property Type and Location
The location of the property which the borrower is planning on buying also affects the interest rate on home loan. New properties in well-accessible locations with modern amenities are likely to have a high resale value. In case of default, the lender can sell them for a good amount, and thus loans against such properties attract lower home loan interest rates. Thus, we can say that lenders view homes that have a good resale value as lucrative properties and so charge lower rates of interest for them. However, for older homes with a lower resale value, interest rates charged may often be higher.
Final Words
So, we can agree that buying a home is a big financial decision and one must not hastily rush into it. Knowing the factors affecting the interest rate on home loan can help borrowers make wise decisions and choose the best suitable option. Remember, making an informed decision while availing of a home loan will not only help you save money on the interest but can also save you from future financial complications.
