Becoming a house owner is one of life’s most valuable dreams. While some purchase/construct a house to live in, others use it primarily for investment purposes.
Whatever you wish to do, a home loan can fulfill your housing dream by providing enough money on convenient terms. However, the biggest consideration for people applying for home loans is the home loan interest rate.
Home loan interest occupies a prominent part of the EMI (Equated Monthly Installment). So, reducing it is paramount to decrease your loan liabilities.
While the interest rate depends on many factors, some are more important than others.
This article mentions the top 5 factors lenders evaluate to determine your home loan interest rate. Read on to discover time-tested tips to decrease your home loan liabilities before applying for a home loan.
Five Factors that Affect Home Loan Interest Rate
CIBIL is the most popular of all credit rating bureaus in India. It keeps track of every borrower’s payment history and creditworthiness.
When you apply for a home loan and start repaying, your lender informs CIBIL, and CIBIL increases your credit score. However, if you do not repay on time, CIBIL gets the information and decreases your credit score.
A good CIBIL (read, credit) score directly affects the home loan interest. For instance, a good credit score of 750 and above indicates that you are a serious borrower who rarely misses EMIs. This prompts the lender to offer you the best rate.
You can improve your CIBIL score by making timely repayments and keeping your outstanding debt in check.
Property Value and Location
Lenders usually determine home loan interest rates depending on the property’s resale value. Since a home loan is a secured loan, lenders can recover their money by selling a mortgaged property if the borrower defaults.
For instance, if your house is in a remote location, its resale value will be less. So, your lender might increase the home loan interest to minimize credit risks.
Conversely, if you plan to construct/purchase your house in a locality surrounded by roads, highways, train and metro stations, airports, etc., your home loan interest might be more affordable.
So, it is good to evaluate your property value to stay on negotiating terms with the lender.
The borrower’s income stability also plays a significant role in determining home loan interest rates. Generally, your lender will specify the minimum income you must earn to apply for a home loan.
However, besides the minimum income, your income stability is also crucial. For instance, if you are a Government employee, your home loan interest might be considerably lower than a private employee.
So, if you are a Chartered Accountant, Doctor, Advocate, or a Government job holder, you can expect the best home loan interest rate. However, if you are not among the aforementioned people, show your savings to prove that you can repay the EMI on time.
The interest type plays a massive role in determining home loan interest rates. When you apply for a home loan, your lender will ask whether you want to choose a fixed or floating rate.
The fixed rate is best for borrowers preferring stability in the EMI. But, a floating rate is advantageous if you are sure the interest rates will decline.
So, choosing the right interest type is crucial to getting the best home loan interest rates.
Loan Amount and Tenure
If you want a high amount, you may have to shell out more on account of home loan interest. This is because a high loan amount implies higher risks. Also, if you choose an extended term, your lender will increase the rate.
So, you must pick the loan amount and tenure after carefully evaluating their impact on home loan interest.
Since the home loan interest comprises a significant part of your EMI, it is wise to evaluate it before applying for a home loan. Sensible investors follow the tips mentioned above to improve their eligibility before availing of a home loan.