Borrowers should have a thorough knowledge of the key factors affecting home loan interest rates in India before applying for this credit option
With the easy availability of home loans, people can now fulfill their dream of owning a home. Moreover, the high loan amount and competitive home loan interest rates have made this credit facility popular among home buyers in India.
The monthly installments and cost of borrowing are greatly affected by the interest rates. Hence, before applying for this credit option borrowers must have a thorough knowledge of the key factors affecting home loan interest rates in India.
How do financial institutions determine home loan interest rates?
Lending institutions consider the following factors while determining home loan interest rates for a particular borrower:
property location
The location of the property also affects the interest rates on home loans. If a property is located in a posh location, with facilities like railway station, grocery stores, hospitals, schools, etc., it will have a higher resale value.
As a result, financial institutions will charge lower interest rates for such properties. On the other hand, choosing a property in an area with poor amenities will result in a higher interest rate.
income stability of a borrower
The interest rates charged by any financial institution depend heavily on the income status of the borrower. Lenders favor borrowers with a steady source of income. Hence, lower interest rates are given to salaried people as their steady income indicates their ability to repay the loan on time.
amount of loan
Borrowers should give equal weighting to the loan principal. Higher loan amount will increase the home loan EMI burden for a borrower, thus increasing the risk of credit default. Hence, financial institutions charge higher interest rates for higher loan amount.
Borrowers should make sure to pay a sizable down payment if they require a larger loan principal. A higher down payment will lower the loan balance, resulting in a lower home loan interest rate.
Home Loan Interest Rate Type
Borrowers must choose between a fixed interest rate and a floating interest rate, depending on their repayment capabilities. Fixed interest rates are optimal for borrowers who want security and want to stay away from market fluctuations. As the name suggests, a fixed interest rate remains the same throughout the repayment tenure of the home loan.
The floating interest rate, however, varies with market fluctuations. Hence, borrowers can opt for a floating interest rate if they want to take advantage of changes in base rates and reduction in repo rates.
home loan repayment tenure
Home loan interest also depends on the repayment tenure chosen by the borrower. A shorter repayment tenure attracts a lower interest rate. However, a longer repayment period results in a higher interest rate, which increases the overall cost of borrowing.
credit score or cibil score
Credit score or CIBIL score is a numerical assessment of the repayment history and creditworthiness of a borrower. Low-risk borrowers are those who have a CIBIL score of 750 or above, and as a result, they are liable to pay lower interest rates for home loans.
Borrowers with poor CIBIL scores are charged higher interest rates due to the higher risk of credit default. Consequently, interested applicants must ensure that they have a good credit score before applying for a housing loan.
That said, aspiring borrowers must also check the eligibility criteria and documents required for home loan while applying for the credit. In such situations, a home loan eligibility calculator can come in handy. Knowing the eligibility criteria and keeping the documents ready makes the home loan application process hassle-free.
The table below shows the eligibility criteria that a borrower needs to fulfill in order to apply for a home loan in India:
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