A home loan is one of the biggest and largest financial commitments for an average individual in India. The interest rate levied on a home loan is the biggest deciding factor for the final amount you will pay while purchasing your home. While availing of a home loan, you must ask the right questions, such as how to apply for a home loan? Which interest type to choose from? What should be your loan tenor? Various online websites with tools, such as a home loan eligibility calculator, help borrowers find the most suitable interest type and other eligibility criteria for their income. These financial tools help one make informed and right decisions while availing of a home loan in India. The rate of interest levied on a home loan depends on various factors and is bound to slightly differ per the states across India. If you are careful and aware of the factors that regulate interest rates while availing a home loan, you can save a lot of money. Some of the important factors that affect your home loan interest rate are discussed below.
Type of Interest
The most important factor that affects your home loan interest rate is the type of interest rate. One must try their best to choose the right type of interest as per their budget and lender’s availability. There are three types of interest- floating, fixed, and mixed interest. In the floating rate of interest, the interest rate fluctuates per the market, and it is regulated by the Reserve Bank of India, RBI. On the other hand, the fixed interest, as the name suggests, remains constant, and the borrower pays the lender the same interest rate as decided in the agreement. In a mixed interest rate, the borrower pays a fixed rate of interest for the initial period, and then after the agreed terms, the rate of interest changes to the market rate, i.e., payment is done per the floating rate of interest.
Generally, the floating rate of interest reaps more benefit for the borrower as the rate of interest remains slightly lower than the fixed interest. The lender charges a higher rate of interest when the loan is granted at a fixed rate owing to future risks and other uncertainties.
Down Payment Amount
The size of your down payment is a crucial factor in determining the interest rate. Often the size of the down payment is inversely proportional to the rate of interest, which means that if you have paid a huge amount as a down payment, it is likely that the lender will charge a lower rate of interest on the token amount. Lenders are at less risk when you have a higher stack on property. Furthermore, most lenders charge a higher rate of interest for a higher loan amount. Therefore, it is advisable to pay a higher down payment if you want to reduce your EMI.
Tenor of Loan
A shorter tenor of the loan will help in lowering the interest rate. However, the EMIS will be slightly higher than for a loan with a longer tenor. With tools, such as a home loan eligibility calculator, you can find the best suitable loan tenor for your home loan. When you take a large loan, it has more lending risks and hence, the interest rates are likely to be higher. To lower down your home loan interest rate, opt for a shorter tenor, but the down payment should be high enough so that your monthly EMI does not shoot high.
Location of your Home
The interest rate is also affected by the location in which your property is located. In India, the interest rate slightly varies from state to state, per the infrastructure and living amenities of the area. Many lenders offer different interest rates depending on whether a property is located in an urban and or a rural area. It is commonly believed that urban properties have more resale value, therefore the interest rate charged is less. Properties with lower resale value fetch higher interest rates in the market.
A perfect credit score will leave a positive impact on your interest rate while availing of a home loan. Individuals with a credit score of 750 and above are considered more creditworthy and have higher chances of loan approval at a lower interest rate. On the other hand, a lower credit score portrays a high credit risk, which would cause lenders to charge a higher rate of interest. Also, banks are entitled to increase your home loan interest rate if they find any major fall in your credit profile or creditworthiness.
Source of Income
Maintaining income stability is another crucial aspect of home loan eligibility and interest rate often depends on your income sources. A stable and secure source of income will attract a favourable rate of interest since the lender is at less risk of any default in payment. On the other hand, risky business and unstable careers might lead to increased home loan interest rates.