Seven Factors That Affect Your Home Loan Interest Rate
Thank heavens for home loans. Home loans are a type of financial aid that makes it possible for many to have their dream homes or properties. You don’t need to have the cash ready to pay upfront for the property. This article dives into the main factors that influence the Equated Monthly Installments (EMI) and the interest rate you will get for your home loan.
This is the Marginal Cost of funds Based Lending rate. This is the minimum interest rate that any bank can loan with. The MCLR depends on other factors like the operating cost, the Cash Reserve Ratio or CRR, the marginal cost of funds, and also tenor premium.
The MCLR is subject to an annual reset date, and this date remains applicable until the following year’s reset date. This is irrespective of any changes made to the MCLR in between these dates. What this means is that your interest rate may fluctuate according to 45he changes that could occur in the MCLR.
Type of Interest
Interest comes in many forms, not just one standard. You have options between floating rate, fixed-rate, and a mixed rate. However, there are small but impactful differences between these interest rates. The floating interest rate change depends on the changes as laid by the bank itself. The same interest rate is applicable for the entire tenure of the loan. However, mixed interest rates begin with a fixed interest rate for a set period and then become a floating interest rate after that.
This is the Loan-to-Value ratio. The LTV refers to the percentage of the estate value that may be financed via the loan in question. A larger loan will mean a higher interest rate as it translates into higher credit risk. However, a larger down payment could help to reduce the figures and reduce the interest rates as well.
Do not underestimate the effect of your credit score on your interest rates. A credit score is a statement of your financial history in terms of repayment of debts and accounts. Your credit score is a number that represents your financial habits and discipline, your repayment trends, and your credibility or creditworthiness. It tells the lender how reliable a payer you are. The lower your score, the more of a risk you are to a lender. This means lenders charge higher rates for lower credit scores as a means of covering their risks. To score lower interest rates, work on a higher credit score.
Location of the Property
Property location plays a crucial role in the interest rate of your loan. If the property in question is in an area that offers excellent amenities and high connectivity, the home or property will have a higher resale value. Similarly, properties and homes in a cheaper neighborhood with less accessibility and fewer amenities nearby will be more affordable comparatively. However, they also have a lower resale value. This is the trade-off. Newer properties are better assets than older properties. The higher the resale value of a home or property, the lower the interest rates typically are.
Just like your credit score affects the interest rate, so does your job profile. A more secure or stable income will make you lower credit risk in the eyes of a lender. This means if you have a permanent job, you are more likely to secure a lower interest rate than if you were a business owner or self-employed person. However, the exception to this are professions like doctors or chartered accountants. Similarly, professionals in other volatile work situations working as a freelancer with variable income, also stand an exception. Salaried professionals and government employees get this at a comparatively low-interest rate than those working in the private sector.
Tenure of the Loan
Loans with shorter tenures typically feature higher EMIs and lower interest rates, while investments with longer tenures usually feature lower EMIs but higher interest rates. Finding the best tenure for your loan to strike a balance between EMI and interest rate is easy. However, this applies if you use an online calculator rather than doing it manually.
The seven factors listed in this article are the major factors you can expect to influence the calculation of your home loan interest rate. While there are other factors, these are typically the main factors to consider. Some of these are within your control, while others are simply in the hands of the economy. While you are choosing with your home loan, bear these factors in mind to secure the best home loan interest rate for your needs.
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