Home loans can substantially impact your financial health and even your quality of life in the long run. The lending terms you agree to will dictate how financially comfortable or distressed you are for many years to come. Finding the right EMI amount, which is feasible as well as ensures early repayment, is crucial to borrowing smartly. Among the several factors that decide lending terms, home loan rate of interest is of utmost importance. While other factors, such as the economic condition, inflation, and your income, are beyond your control, the rate of interest is something you can influence to a degree.
Here are five factors that can affect your home loan interest rate
. Keep these in mind to ensure repayment is as affordable as possible.
The home loan interest rate type
To avoid all interest-rate fluctuations you can take a fixed-rate housing loan. The advantage here is that your rate won’t be affected by economic and market conditions, and you can plan repayment with a great deal of certainty. However, fixed interest rates are generally a notch higher than floating rates and prepayments under certain conditions are subject to prepayment penalties.
Floating-rate loans, on the other hand, help you benefit from repo rate cuts, and if you are expecting policy rates to fall, you should side with floating interest rates. Moreover, prepayment penalties are waived for floating-rate loans. However, the downside here is that your home loan interest rate could increase, and there is some level of uncertainty involved.
The interest rate regime
Floating-rate home loans are pegged to either an internal or external benchmark, with the latter ensuring better transmission of policy rate changes. Many older loans are based on lenders’ MCLRs, while many newer loans are based on the RBI’s repo rate. When compared, RLLR-based loans bear a greater resemblance to the repo rate as the MCLR is dependent upon the lender’s internal mechanism.
If you have an RLLR loan, you can expect faster and more transparent transmission of repo rate cuts. However, your home loan interest rate could also become more volatile and one can have a reverse impact as well in an increasing rate scenario. With both regimes, remember that the actual interest rate you get is subject to a margin and sometimes, a risk premium too.
Your financial profile
Lenders are allowed to include in the home loan interest rate a spread or risk premium to account for your risk profile. In short, the riskier you are as a borrower, the more lenders may have to charge to offset the lending risk. Two ways of reducing the lending risk are:
1. Keeping a high CIBIL score: This score ranges between 300 and 900, and you should strive for one above 750, which indicates that you are creditworthy and have a reliable history of debt payments. This metric can tilt the scales in your favour, so make sure you check your CIBIL score and improve it by paying your current EMIs on time, limiting your credit card utilisation to 30%, fixing errors in your credit report, and so on.
2. Maintaining income stability:
A home loan is a significant financial commitment, one that often spans decades. You need the financial wherewithal to service your EMIs for, say, 240 months if you take a 20-year loan. Hence, financial stability becomes a crucial factor and, apart from meeting the minimum income requirement listed with the home loan eligibility criteria
, you must have a good job. Those holding government posts or working at reputed private establishments are considered low-risk. Medicine and accountancy are also professions that can attract a favourable interest rate.
The loan amount and tenor
Larger loans carry more lending risk and hence, higher interest rates. The solution is to make a larger down payment. Going for a larger down-payment and thereby a lower Loan-to-value (LTV), gives the lender an extra comfort and may help you secure a better interest rate.
Likewise, be careful with the tenor you choose. A longer tenor may help you make your EMIs budget-friendly, but a shorter tenor could help you secure a lower rate and lower your net home loan interest payment. This is because your financial profile is more likely to remain constant in the short-term.
The property’s resale value
Home loan interest rate varies as per the property’s location, amenities, condition, and other factors, such as connectivity. Newer properties, with a higher resale value, will likely attract a low-interest rate. High value properties can be easily liquidated in the event of non-payment of the home loan and as such, invite better interest rates as they reduce the lending risk.
Now that you know the key factors that affect your home loan interest rate, take the right steps to avail of a cost-effective loan, such as the Bajaj Housing Finance Limited Home Loan. Here, you are assured of some of the most attractive interest rates for a sizable loan amount. You can repay your loan over a maximum of 30 years and benefit from a PMAY interest subsidy as an eligible first-time homeowner. To get cost-effective financing, apply online today!