How Are Interest Rates For Home Loans decided?

The year-on-year price of purchasing a house went up by 3.8% in September 2022, which has been similar to the previous quarter. The increasing culture of work-from-home and double-income families are key determinants of the heightened demand for residential properties.

The constant increase in real estate prices made Home Loans an essential part of home buying. Many leading banks in the country offer Housing Loans to eligible customers. This helps them realise their dream of owning a house. 

When availing a Housing Loan, the primary concern of a borrower is its rate of interest. A Home Loan interest rate is the primary contributor to a loan’s cost to the borrower. A low-interest rate transcends to a cheaper loan for the customer. Well, you don’t have to worry about the same, as a Housing Loan calculator shows the EMI (Equated Monthly Instalment) one has to pay towards the desired loan amount. This tool allows you to opt for a suitable tenure and ensure a low interest payout.

Know about the factors banks use to determine the Home Loan interest rate.

Factors that Affect Home Loan Interest Rates

Home Loan interest rates vary for different customers and can start at as low as 8.65% per annum with leading banks in the country. Here are the factors lenders use to decide the interest rate for a Home Loan customer.

– The creditworthiness of the borrower

The CIBIL score of a customer shows their creditworthiness. Lenders use it to analyse the past repayment records of an individual. It shows how disciplined a person has been with earlier debts, like credit card bill payments. 

Individuals with a high credit score (750+) are more likely to be responsible toward their new financial commitments and this is what makes lenders feel comfortable. So it is advisable to repay long-standing debts and credit card bills to improve one’s credit score before applying for a fresh Home Loan.

– Duration of the loan

Housing Loans are long-term financial commitments and the loan duration may range between 1 to 20 years with top banks in the country. The loan duration affects the Home Loan EMI. 

A loan with a shorter repayment term results in a higher EMI and vice versa. However, one must know that a longer duration on a Home Loan reduces their monthly EMI but increases the overall interest rate applicable to the loan. 

Choosing the loan tenure based on the monthly repayment capacity is advisable.

– Repo rate

The repo rate that the Reserve Bank of India (RBI) decides for the banks acts as a benchmark for Housing Loan interest rates. The current repo rate stands at 6.25% and is subject to changes from time to time. Banks keep the Housing Loan interest rate in line with RBI’s repo rate.

– The work profile of the borrower

Lenders categorise people with steady jobs and regular business incomes as low-risk customers and are willing to provide them with a Home Loan at a lower interest rate. Doctors, Chartered Accountants and employees working in the public sector or reputed private sector firms come under the low-risk category for lenders. In the absence of a steady job or substantial income, consider taking a joint loan with a parent or spouse to increase income sources.

– Down Payment on the Home Loan

Housing Loan customers pay a part of the property’s value out of their pocket. It is known as the down payment on the property. A higher down payment leads to a smaller loan amount, which results in a lower interest rate on loans. 

A Home Loan borrower may consider making a sufficient down payment on the property that they can comfortably afford to bring down the Housing Loan interest rate.

– Property’s location

The property’s location also affects the Home Loan interest rate. A property in urban and developing areas attracts a lower interest rate than properties in remote or isolated areas.

Banks offer Home Loans under fixed, floating, and mixed interest rate categories. The fixed interest rate remains unchanged for the entire loan duration, the floating rate changes with the change in the repo rate, and the mixed interest rate stays fixed for a particular time and then converts into a floating rate. Housing Loan customers can use a Housing Loan calculator to choose the interest type as per their comfort. Consider the above factors to get a lower interest rate on the Home Loan.

Also, Check: Can I Get a Home Loan On a 40,000 Salary?