In your quest to avail the best home loan, start by scouting the offerings of home loan interest rates from different lenders since the interest rate varies across lenders. To see the impact of even a small change in the interest rate on your EMIs, you can use tools such as the home loan calculator. This will help you choose the most affordable home loan.
Along with a nominal interest rate, many NBFCs also offer a number of additional features to make your repayment easier like a long tenor and zero or minimal charges on prepayment and foreclosure. Plus, you can take a top-up loan to address other financial needs.
While these benefits can add convenience to your repayment, knowing more about the factors that influence home loan interest rates can help you change those in your control and repay with greater ease.
4 factors that impact home loan rates in India are mentioned below:
The RBI sets rates based on the various monetary factors in the market every quarter. These rates like repo rate, reverse repo rate, and cash reserve ratio affect the cost of borrowing. With an increase in repo rate, for instance, lenders increase the rate of interest on your home loan and vice versa. So, the RBI’s monetary policy affects home loans on a floating interest directly and home loans with a fixed rate of interest indirectly.
Economic Growth and Rise in Inflation
Whenever the economy sees a rise in disposable income the purchasing power for every individual automatically hikes up, creating a demand for more funds. This rise in demand causes the interest rates for all loans, including home loans, to rise. A drop in demand causes the interest rates to decrease. The rise in the cost of goods and services within the economy is known as inflation and it decreases the purchasing power of the rupee. As inflation increases so do interest rates and vice versa. So, keep a watch on market conditions and apply for a home loan when you find favourable interest rates on your home loan.
Your Credit Score
Your credit score largely determines the amount that a lender will disburse to you as a home loan and the interest you pay on it. This is because your credit score represents your financial credibility and track record. This score is a representation of your previous loans and the repayment behaviour towards these debts. Having a good credit score is key to getting a substantial home loan sanction on competitive interest rates. Lenders usually consider those with a score of 700 and more as having a good credit score and may offer a home loan interest that is a few basis points lower. This makes your repayment more pocket-friendly.
Your Income and the Number of Loans You are Currently Servicing
Since a home loan is usually of a substantial amount with a long tenor of up to 20 years, lenders consider your repayment ability before offering you the loan. So, your income and the number of loans you currently handle directly impact your housing finance approval and interest rate. Lenders tend to view you less credible when you have a number of on-going loans like car loans, business loans or educational loans and open debts like dues on credit cards. By reducing the amount of existing debt or increasing your income, you are bound to have a healthy debt-to-income ratio that in turn will increase your chances of getting a quick loan approval and also get the best home loan deal. Aim to keep your debt below 15% of your total income before applying for a home loan. Moreover, check to see that even with the home loan your debt-to-income ratio does not exceed 40% of your monthly income.
Apart from these 4 factors, the type of rate you choose for your home loan, be it floating or fixed, also affects the rate you are offered. Usually, a fixed interest rate is higher than a floating rate. Additionally, some lenders may offer you a more competitive interest rate if you make a larger down payment or increase your interest if your home loan amount is significantly smaller or larger than normal.
The above factors influence and affect the home loan interest rate you pay as a borrower, so account for this while seeking housing finance. It is also important to have all the documents required for the home loan in place so that you can easily qualify for it based on the eligibility criteria of your preferred lender.