Recently, when RBI reduced the repo rate to 4.00%, it provided the home buyers with a degree of comfort that now they can avail home loans at a lower interest rate.
Now, for most applicants, a home loan is the most significant financial obligation they will take up in his/her life. So, a minor change in this interest rate will make a substantial difference in the overall payment.
Therefore, applicants must be aware of the factors that affect their home loan interest before they go ahead with their application.
MCLR (Marginal Cost of Funds based Lending Rate) is the minimum rate on which financial institutions lend money to their borrowers. Now, this rate depends on several factors like the Cash Reserve Ratio (CRR) and its negatives, operating cost, marginal cost and tenor premium.
MCLR changes periodically, which depends on the lender. Financial institutions usually link the 12-month MCLR with their housing loan.
Type of Home Interest Rate
Home loans are available on two types of interest rates viz. fixed and floating. An applicant can choose either of them and then pay EMIs accordingly –
- Fixed interest rate: Here, borrowers pay a fixed rate of interest throughout their tenor. A significant advantage of this rate is that it doesn’t change with fluctuations in the market.
- Floating interest rate: This rate is primarily based on the MCLR set by the lenders. Hence, it keeps on changing based on the current market rates and trends.
Location of the Property
Location plays a significant role in the home loan interest rate. A borrower who is investing in a property with a higher resale value will enjoy a low home loan interest rate and vice versa.
The ideal CIBIL score for a home loan is 750 or above. When a borrower maintains this score, it portrays a low credit risk profile to the lenders. As a result, the borrower can enjoy a lower interest rate on the housing loan compared to someone who has a low credit score.
Loan to Value (LTV) Ratio
LTV is the ratio between the amount being sanctioned and the market value of the asset to be mortgaged. If this ratio increases, it will automatically increase the risk factor, and a higher interest rate will be charged.
An effective way to counter this is to make a lump sum down payment. Now, a useful way to find out the ideal down payment amount is to use a house EMI calculator available online. Through this, borrowers can not only find out the down payment amount based on the metrics but also how much home loan EMI they can afford.
The employment profile of an applicant plays an essential role in deciding the interest rate. An applicant with a stable source of income will enjoy a lower interest rate compared to someone with an unstable source of income.
Whether you are in service or self-employed, make sure to mention the availed advance when filing IT returns to enjoy home loan interest tax benefits.
Apart from the above, opting for Pradhan Mantri Awas Yojana (PMAY) also affects housing loan interest rates. This centrally-sponsored scheme offers subsidies on the rate of interest.
By satisfying all the above factors, a borrower will be able to avail a better home loan interest rate. Additionally, they will also be able to receive quick approval of their credit.