Important Factors that Affect your Home Loan Interest Rate

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Important Factors that Affect Your Home Loan Interest Rate_WC

5 min 13 Mar 2024

factors affect housing loan interest rate

Highlights

Credit Score
Location and Property’s Value
Type of Interest Rate
Income and Occupation

The Home Loan Interest Rate is one of the most essential factors that determine the feasibility of a loan. The interest rate is the cost you pay (calculated as a percentage) upon borrowing the principal loan amount.

It is, therefore, important that aspiring borrowers are mindful of the factors that can influence the interest rate they stand to get on their Home Loans. This will help them to make informed decisions or take corrective measures to enhance their eligibility and get a more competitive interest rate on Home Loan.

Important Factors that Affect Your Home Loan Interest Rate

Credit Score

Your credit score is also an important measurement of your repayment capacity, which is why lenders see it as an important parameter. Your credit score is calculated based on your payment history, existing debts, and financial obligations, among other things. A healthy credit score increases your chances of securing a Home Loan with a competitive interest rate.

Interest Rate Type

The interest rate type you choose affects how much you pay as interest on your Home Loan. The fixed interest typically remains the same until the reset period set by the lender, if any. However, the fixed interest rate is often a little higher.

On the other hand, floating interest rates change along with market conditions, and you may enjoy a reduction under favourable circumstances. Typically, the floating interest rate Home Loans are more cost-effective than their fixed counterparts.

Income and Occupation

The borrower’s employment status, type, and income play an essential role in setting their Home Loan interest rates. This allows them to realistically evaluate your risk potential and repayment capacity.

Loan-to-Value Ratio

The value of your property also determines the interest rate you stand to get. The age, location, and market value of the property are considered while evaluating the amount you can get from the lender. If your LTV is on the higher side, then the chances of you getting a lower interest rate might be slimmer.

Repo Rate and the Interest Rate Regime You Have Chosen

Home Loans are offered at two types of interest rates. When borrowers opt for fixed interest rates, the rate of interest remains the same until reset by the lender. When borrowers opt for floating interest rate Home Loans, the rate of interest varies based on external market conditions. External market conditions govern the Repo Rate. When the inflation within the economy increases and the growth of the economy enters the slump phase, the Repo rate increases, which is the rate at which the RBI lends funds to commercial lenders within the company. When the Repo Rate increases, the Home Loan interest rates increase too. On the other hand, when the Repo Rate decreases, Home Loans become feasible.

Lenders charge a higher rate of interest on floating interest rate Home Loans or floating interest rate Home Loans are more expensive than fixed interest rate loans as the risk involved for the lender is higher in the case of floating interest rate loans.

Final Thoughts

After you consider all the important factors that affect your Home Loan interest rate, we recommend using a Home Loan EMI Calculator to find a payment plan that suits your requirements well.

Additional Link: Types of Home Loans Available in India

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