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Deciding to take a home loan is one of the biggest financial decisions one ever makes. It’s a decision that also impacts one’s financial health and well-being. Home loans are big-ticket, long-term loans and therefore, one must take them after careful consideration.
When deciding to take a home loan, you will have to figure out the right combination of the home loan amount, tenor, and interest rate for you. Borrowers usually cap the loan amount that one can get and the loan tenor on a home loan cannot usually exceed 20 years. So, when it comes to these two, i.e. the final loan value and tenor, there is not much scope for negotiations. However, there is one thing that you can negotiate for with your lender and that is a good home loan interest rate.
When it comes to home loans, the interest rate you get is one of the key factors that determine how easy or difficult it will be for you to pay your EMIs each month. Borrowers should try their best to get the lowest interest rate possible to ensure a stress-free home loan repayment journey. However, negotiating for a good home loan interest rate is only possible if you have a thorough understanding of the factors that affect home loan interest rates. This article focuses on these factors.
4 Factors That Influence Your Home Loan Interest Rates
1. An Applicant’s CIBIL Score
The CIBIL score is a three-digit number ranging between 300 and 900 that is indicative of an applicant’s repayment capacity. CIBIL score is calculated after taking into account several factors, such as a borrower’s past repayment behaviour, current outstanding debt, income, etc. A high CIBIL score, i.e. 750 and above denotes that a borrower has never defaulted on loan payments and can be trusted with a big financial commitment, such as a home loan. A low CIBIL score, i.e. below 750, indicates irresponsible financial behaviour. Lenders extend their best home loan interest rates to individuals who pose a minimum risk. Thus, borrowers whose CIBIL score is close to 800 end up getting low-interest rates. On the other hand, borrowers with a low CIBIL score often find themselves paying high-interest rates on all kinds of loans, including home loans.
The good thing is an individual can improve their CIBIL score. All one needs to do is practice financial prudence for a continued period and the CIBIL agency will automatically upgrade your CIBIL score. So, if your CIBIL score or credit report is bad, work on making it look better and apply for a home loan only after your CIBIL score touches at least 750.
2. Loan-to-Value Ratio and Loan Tenor
The loan-to-value ratio is the ratio of the value of the loan with respect to the value of the asset purchased with the loan. For instance, if you have your eyes on a property worth Rs.1 Crore and you take a loan worth Rs.70 lakh, your loan-to-value ratio would be 70%. When it comes to home loans, lenders sanction up to 80% to 90% of a property’s value as a loan. However, the risk involved in sanctioning a loan with an LTV ratio of 90% is much higher than sanctioning a loan with an LTV ratio of 70%. Thus, borrowers who keep their LTV ratio on the lower side end up getting better deals. In any case, it is always a good idea to put down a higher down payment as this allows one to keep EMIs under control, save on the total interest outgo and become debt-free sooner.
The loan tenor one chooses also has an impact on the final interest rate offered to them. Borrowers who opt for a shorter tenor almost always end up getting a lower interest rate than someone who has opted for a longer tenor.
3. Repo Rate
The Repo Rate is the rate at which the central bank of a country lends money to commercial banks. The Repo Rate is an important tool that the central bank uses to control inflation and money flow within the economy.
When inflation increases, the central bank of a country increases the Repo Rate. Thus, commercial banks have to borrow money from the central bank at a much higher interest rate. This, in turn, compels commercial banks to charge higher interest rates on all loans, including home loans. On the other hand, when the money flow within the economy decreases, the central bank of a country decreases the Repo Rate which leads to loans becoming cheaper.
One must understand that external market conditions affect home loan interest rates only if a borrower has availed of a loan on floating interest rates. External market conditions do not affect home loan interest rates if the loan is on a fixed rate regime.
4. Borrower’s Income Profile
As mentioned before, lenders extend their lowest home loan interest rates to individuals who are least likely to default on loan payments. One of the ways a bank/NBFC assesses the chance of loan default is by analysing a person’s income profile. People with stable jobs and stable incomes are less likely to default on loan payments than someone who constantly switches jobs. Similarly, self-employed individuals with a business vintage of at least a few years and good profitability are less likely to default than someone who has just entered the business world. If you want to avail of home loan with low-interest rates, make sure to find a way to prove income stability.
The current home loan interest rates vary between 8% and 15%, which is quite low. If you are planning to buy a home, now is the time to do so. Just remember to use the information provided in this article to your best advantage and get yourself the lowest interest rate possible.