Loan interest

5 Key Factors Influencing Your Home Loan Interest Rates

Lenders consider a range of parameters when setting loan rates for home loans. So, understanding these factors can enable you to get a suitable home loan with the lowest interest cost.

Since lenders consider a range of parameters when setting loan rates for home loans, understanding these factors can help you secure a suitable home loan with the lowest interest cost. depending on your eligibility.

Here are some of the key factors that determine your home loan interest rate:

Credit score

Many lenders have started to adopt risk-based pricing in which they consider the credit score of home loan applicants while setting the interest rate for the loan. As those with good credit ratings are considered creditworthy due to their disciplined repayment history, lenders entice them by offering lower interest rates on home loans. Therefore, those considering availing home loans should collect their credit report at least 6 months before submitting their application.

This would give them enough time to take the necessary steps to improve their credit scores before submitting their application. It would also help detect clerical errors or wrong information, if any, in credit reports. Once such error or misinformation is reported to the concerned bureau or lender, the rectified credit report will automatically reflect a higher credit score.

Amount of the loan

Higher loan amount can mean higher credit risks for lenders and hence they charge relatively higher interest rates for home loans involving higher loan amount. For example, interest rate for SBI home loan for amount up to Rs 30 lakh starts from 6.75% per annum, while interest rate for loan amount above Rs 30 lakh and Rs 75 lakh starts from 7.00% pa and 7.10% pa, respectively. Therefore, borrowers should try to accrue a higher down payment or margin contribution if it would help them qualify for a home loan at a lower interest rate.

Interest rate type

Home loan interest rates are categorized into 3 types – floating, fixed and blended interest rate. The floating interest rate varies with changes in the benchmark interest rate tracked by the lender, while fixed rate home loans remain constant throughout the life of the loan. With respect to mixed/hybrid rate mortgages, these remain fixed for a predefined period, usually 2 or 3 years, after which they become variable rate mortgages. Since mixed and fixed interest rates tend to involve higher risks for lenders, banks and HFCs charge a higher interest rate to compensate for their loss of interest income from adverse changes, where applicable, the interest rate regime.

Loan to value ratio (LTV)

The LTV ratio of a home loan is the proportion of the value of the property sanctioned as a loan by the lender. The remaining amount must be financed by your own funds in the form of a deposit. As banks have to make larger provisions for home loans with a higher LTV ratio, they compensate for this by charging a higher interest rate for loans with higher LTV ratios. Therefore, borrowers should try to opt for a lower LTV ratio to reduce their interest charges.

Job Profile

Many banks and HFCs consider the source of income of home loan applicants when setting the interest rate. Generally, salaried people pay a lower rate of interest than self-employed professionals due to the greater income certainty of salaried people. Among salaried applicants, government and PSU employees are most preferred due to greater job and income certainty. They are followed by those who work in reputable and prominent organizations in the private sector, as these companies are considered to be more stable with a higher potential to withstand economic downturns compared to other private sector companies.

As lenders’ appetite for credit risk and the setting of interest rates tend to vary widely, borrowers should compare as many home loan options as possible before settling on an offer. They should first approach banks or NBFCs/HFCs with whom they have an existing relationship, as many lenders offer preferential interest rates to existing consumers. Then, follow up by visiting online financial markets to compare interest rates offered by other lenders.

(By Ratan Chaudhary, Head of Home Loans, Paisabazaar.com)