One of the most important factors while taking a home loan to consider is the interest rate. It establishes the cost of borrowing and overall affordability. Various factors influence the interest rate offered by banks and NBFCs. Understanding these are essential in making an informed decision. These are the factors that impact your home loan interest rate.
Top factors that impact your home loan interest rate
Credit score
Your credit score reflects your creditworthiness and financial history. A higher credit score indicates responsible credit management and can result in a lower interest rate. Whereas a low credit score may lead to a higher interest rate or even difficulties in getting a loan. Maintain a good credit score by paying your credit card bills on time, minimising existing debts, and resolving any outstanding issues on your credit report.
Loan-to-Value ratio (LTV)
The Loan-to-Value (LTV) ratio represents the loan amount as a percentage of the property's appraised value. All financial institutions use it to assess loan risks. A lower LTV ratio indicates less risk for the lender. As the borrower is paying more, and there is a possibility of getting competitive interest rates. Higher LTV ratios may need mortgage insurance or stricter terms. The LTV ratio can vary based on factors such as the borrower's creditworthiness, the type of property, and the lender's policies.
Loan tenure
The loan tenure refers to the duration of the home loan. Generally, longer loan tenures result in higher interest rates compared to shorter tenures. Longer tenures imply a higher level of risk for the lender, as there is more time for unforeseen circumstances to impact loan repayment. If you can afford higher monthly instalments, opting for a shorter loan tenure can help you secure a lower interest rate.
Type of interest rate
There are two types of interest rates for home loans — fixed interest rates and floating interest rates. The fixed interest rate remains constant throughout the loan tenure, whereas the floating interest rate fluctuates based on market conditions. Choosing between fixed and floating rates depends on your risk appetite and your ability to handle potential fluctuations in your monthly payments.
Income and employment stability
Lending institutions assess your income and employment stability to determine your repayment capacity. A stable income and consistent employment history increases your credibility as a borrower. Most lending institutions offer favourable interest rates to people with a reliable income stream. If you are self-employed, you must maintain legit documentation to show a steady income, to improve your chances of securing a lower interest rate.
Market conditions
The market conditions and the Central Bank’s monetary policies may influence home loan interest rates. If the Central Bank has set low borrowing interest rates, the lending institutions may offer lower interest rates. In times of economic volatility or inflation, when Central Bank may have increased the rates, lenders may increase interest rates on home loans. Keeping an eye on market trends and consulting with lending institutions can help you make informed decisions.
Existing relationship
Building a long-term relationship with your lending institutions can be of benefit. If you exhibit responsible financial behaviour with your current lending institution, you may have access to more favourable interest rates or customised loan offerings. Bajaj Finance offers favoured interest rates or additional perks to existing customers.
By understanding these factors and working towards improving them, you can increase your chances of obtaining a home loan with a favourable interest rate, making homeownership more affordable and achievable.
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