Purchasing a home is one of the biggest investments one makes during his lifetime and taking a home loan translates that investment into his biggest financial commitment. The affordability of a home loan hinges on its interest rate and even a slight difference could make a home loan substantially more expensive, especially given its long tenure. Financial institutions consider an array of factors while deciding upon an interest rate for a home loan applicant. Let us look at some of the factors that have a strong impact on home loan interest rates:
The credit score is used by financial institutions as a measure to check your creditworthiness and ensure faith in your repayment abilities. A good credit score gives you a chance to negotiate for a lower rate, whereas a lower score ultimately means you will be charged with a higher rate. Some easy tips for a healthy credit score of 700 and above are: keep a check on your debts, make timely payments of your bills, be rational with new credit, and don’t withdraw cash from your credit cards.
MCLR is a benchmark lending rate used by banks to give out loans. It is a product of four important financial principles: the marginal cost of funds, operating costs, premium charged and the effect of Cash Reserve Ratio (CRR) on the account. As these factors vary for different banks, they have different MCLR’s, and thus, different lending rates. A lower MCLR would result in a lower interest rate for a housing loan.
Location and Value of Your Home
A house with poor construction, meagre amenities, and low-profile neighbourhood would reduce its resale value and attract higher interest rates and vice versa. Also, Loan-to-Value (LTV) ratio – i.e. the proportion of property value that can be financed through your loan amount – can also affect loan amount. The higher the LTV ratio, the higher the loan amount.
Many banks charge a higher interest rate as the housing finance value disbursed rises. HDFC bank, for example, charges higher interest rates for a loan bracket of Rs. 30-70 lakhs compared to an amount lower than Rs. 30 lakhs. The only remedy to this situation is to pay a higher down-payment for the loan.
Job Profile of Applicant
A stable job and income inflow are hygiene factors for all lenders. Without a stable income source, there is uncertainty regarding the repayment of the loan. Salaried professionals, government employees, and employees of big private sector companies are usually sought after by lenders.
Type of Interest Rate
For home loans, interest rates are broadly classified into 3 categories – fixed, floating and mixed. Fixed rates stay constant for the entire duration of the loan, floating rates fluctuate as per market changes, while mixed rates stay fixed for a certain period and then transition to a floating rate. As fixed and mixed rates have higher risk attached to them, lenders often charge a higher interest rate to hedge against any loss of interest income.
As we see, there are numerous factors which affect the interest rates that a bank charges for home loans. The subtle differences in these factors make some home loan plans more attractive than others. To get the most appropriate home loan interest rate, it is advisable to ensure that all these factors – both internal and external – are in your favour.
Tata Capital offers flexible home loan eligibility criteria, attractive interest rates, quick approvals, and easy documentation to its customers. With home loan interest rates as low as 9.25%, visit your nearest Tata Capital branch today to fulfil your dream to buy a new home!