Factors that Affecting Home Loan Interest Rates in India

A Home loan can make it possible to build or buy your dream home if you are short on cash. However, the affordability of a loan depends upon the EMI. With EMIs, you can pay back the interest and principal amounts so that it does without putting undue stress on your monthly budget.

In most cases, the whole procedure depends upon the interest rate. There are various factors that influence the rate of interest, and it varies from one lender to another. The Reserve Bank of India (RBI) and its policies affect some of these factors. But in some cases, these factors are variable.

Factors That Influence the Home Loan Interest Rates in India

• MCLR rates

Also known as the Marginal Cost of Funds-based Lending Rate, this is the minimum rate of interest that banks can offer the customer. It depends on various factors, including the marginal cost of funds, the operating costs, the Cash Reserve Ratio (CRR).

MCLR has a reset date, usually applicable until next year’s reset date. During this time, the bank reviews the interest rates for existing home loan borrowers. Moreover, the MCLR on the reset date remains applicable until one gets a new date. Even if there are any changes in between, it would be adjusted in the next year.

It means that the rate usually increases or decreases based on the changes in MCLR.

• Types of interest

You can choose between a floating, fixed, or hybrid interest rate. The floating interest rates can change during the loan tenure.

With a fixed interest rate, you pay your EMIs the same interest rate throughout the loan tenure. 

In the case of hybrid interest rates, you pay a fixed interest rate for a duration while you pay floating home loan interest rate in india for the rest of your loan tenure.

Loan-to-Value (LTV) ratio

The LTV ratio is the percentage of property value that one can finance through a loan. With the help of a more significant loan amount, one attracts a higher interest rate. The reason behind this is the fact that it provides a higher credit risk. If you put down a larger down payment, it brings down the quantum of the loan. As a result, you can have a reduced rate of interest.

• Credit score

Credit scores can significantly impact the rate of interest. It is the statement that speaks about your credit history and your creditworthiness. The credit score also provides information about the financial disciplines and habits of the score bearer.

For instance, if you have a low credit score, you may have to pay a higher rate on your loan. On the other hand, a higher credit score shows a lower credit risk. It leads to the position where the lenders are more willing to offer a lower interest rate. A score of 750 or above is considered ideal.

• Job profile

The job profile of an individual speaks a lot about their income source. For example, an individual with a stable job income is less risky when paying back the loan. But individuals with an unstable income source are generally considered high-risk.

If you have a stable income source, there is a good chance you can get a loan at a lower interest rate. Any salaried person, including government or PSU employees, can get a loan at a lower interest rate. 

• Tenure of the loan

Home loans with shorter tenures generally have higher interest rates, while loans with longer tenures have a lower interest rate. Even though EMIs in the loan for a shorter period might be higher, you pay less in interest.

Bottom line

These are some of the significant factors that influence the interest rate on your home loan. Among these factors, there are few that you can control. But you will also find others that you can’t. All these factors can help you decide to take your home loan according to your requirements and budget.​_