Four Factors Affecting Interest on Home Loan

If you have been contemplating the idea of purchasing a house, now is probably the best time to do so. Home loan interest rates seem to be at an all-time low, before you head out to the bank, go through the particulars given below:

1. Understand RLLR

   RBI allows banks and financial institutes to offer retail loans at flexible interest rates. The repo rate is an external benchmark to which the banks link the home loan interest rate. So, the lower the RLLR repo rate linked lending rate, the lower would be your monthly repayment instalment or the EMI.

   Most banks offer an RLLR of about 6.5%. This reflects a 4% of Repo Rate by RBI and a 2.5% mark up. Nevertheless, not every bank will offer loans at RLLR, the following factors play a key role in home loan interest rates too.

2. Quantum of Loan
   

   The loan amount that you apply for will directly affect the rate of interest. Therefore, it is recommended that you choose the loan amount smartly. As per most experts, it is recommended that you pay at least 20% of the property value as a down payment.

   A loan that is higher will pose a higher risk for the lending institute. Most banks/ institutes may offer you a cheaper rate when you are making a more sizable down payment. A moderate Loan-to-Value or LTV ratio puts you in good standing and can help you grab lower EMI options and thus a reduced interest outlay.

3. Credit Score

   When you apply for a home loan online or offline, another important factor in determining your home loan interest rate is your credit score. When you show good credit history, it reflects your creditworthiness and thus creates a good impression on the lender. An applicant who has a score above 750 may be considered to be a lesser risk by a financial institution and thus may be offered a loan ranging between 7.5% to 8%.

   On the other hand, a score lower than 650 will make the lender doubt your repayment capacity, and they may either altogether reject your loan application or demand a higher rate of interest that could range between 10% to 15%.

4. Type of Home Loan Interest Rate

   You may know by now that banks and financial institutions offer two kinds of interest rates-floating and fixed. As the names suggest, a fixed home loan interest rate stays constant for the loan repayment tenure while the floating rate fluctuates. When you need to apply for a home loan online, you may find that floating rates are lesser than fixed rates by up to 1% to 2%, but you must keep in mind that a floating rate will impact the EMI but the tenor.

   If you prefer certainty in your repayment, you should opt for a fixed rate. In case you want to benefit from any decrease in the base rate, you can opt for a floating rate.

While financial institutions ramp up their efforts to lure customers with competitive home loan interest rates, housing loans seem to be more accessible than ever. At the same time, however, as a prospective borrower, it is necessary that you keep the above-mentioned pointers in mind. Undertaking measures to secure a reasonable interest rate will be instrumental in easing the burden of repayment. Keep in mind that your home loan is a loan-term commitment, and even a marginal drop in the rates can help you save lakhs.