Home loans are a long-term commitment - the maximum loan tenor can stretch to 30 years with most lenders. Thus, one must commit to such a loan after careful financial planning. One of the key factors that affects home loan affordability, in the long run, is home loan interest rates.
Housing loan interest rates directly impact one’s EMIs and the total cost of borrowing the loan. Borrowers must, therefore, develop a careful understanding of the factors that affect home loan interest rates. A thorough understanding of these factors can help one avail of low-interest home loans with affordable EMIs.
Crucial Factors That Affect Your Home Loan Interest Rates
1. CIBIL Score
Want to avail of a low-interest home loan? Make sure your CIBIL score makes you eligible for one. Your CIBIL score is a three-digit number ranging between 300 and 900 that lenders use to assess a borrower’s creditworthiness and repayment capacity. The higher one’s credit score, the better one’s chances of loan approval and availing of a loan on low housing loan interest rates.
Pull out your credit report at least 6 months before beginning the loan application process. This way, if your credit score is below 750, which is the minimum eligibility requirement set by most lenders, you will have ample time to take corrective measures to better your credit score.
2. The Lender’s Benchmark Rate
As per the rules set by the Reserve Bank of India, banks must link their floating home loan interest rates to an external benchmark. This external benchmark could be the Repo Rate, 3-month or 6-month treasury bill rates, or any other rate published by the FBIL. On the other hand, HFCs are not governed by the same mandate and they usually link their floating interest rate home loans to internal benchmark rates.
Your home loan interest rates and, subsequently, EMIs will change every time there is a change in the benchmark rate to which your home loan interest rate is connected.
For instance, if you have linked your home loan interest rate to the repo rate and you are on the floating interest rate regime, your home loan interest rate will increase every time the RBI increases the Repo Rate and vice versa.
Thus, one deciding factor when choosing a lender is whether you would like your interest rate to be linked to an internal or an external benchmark. As an industry-first, Bajaj Housing Finance Limited, a 100% subsidiary of Bajaj Finance Limited, is an HFC that offers home loans with the option to link the interest rate to an internal benchmark or an external benchmark, namely Repo Rate. Their home loans start from 8.60%* p.a. for salaried and professional borrowers.
3. The Chosen Interest Rate Regime
Those planning to avail of a home loan should also take note of the interest rate regimes offered to borrowers in India. Borrowers can choose to pay their home loan on three different interest rate regimes: fixed, floating, and hybrid. Typically, lenders offer floating interest rates.
When one opts for a fixed-rate home loan, the housing loan interest rate and loan EMIs are unaffected by external market conditions and remain the same through the tenor of the loan, or until the reset date. Floating home loan interest rates vary based on external market conditions. Lastly, in the case of hybrid housing loan interest rates, home loan EMIs remain unaffected by external market conditions for the first few years but eventually, the interest rate regime automatically gets switched to the floating type.
4. LTV Ratio
The LTV ratio is the ratio of the loan amount one can avail of against the market value of the property being mortgaged. Let us understand this with an example. Imagine you wish to buy a property worth Rs.1 Crore. You have arranged for a down payment of Rs.30 Lakh and you plan to clear the remaining amount by way of a home loan. In this case, the LTV ratio would be 70%.
Borrowers must also know that the RBI has capped the LTV ratio limit for different loan amounts: for loans up to Rs.30 Lakh, the LTV ratio can go up to 90%. For loans between Rs.30 Lakh and Rs.75 Lakh, the LTV ratio cannot go beyond 80% and for loans above Rs.75 Lakh, it is capped at 75%.
While the LTV ratio does not directly affect your interest rate, it is a key factor to consider. This is because the ratio defines the sum you can avail of as a home loan, which indirectly contributes to the overall eligibility and risk factor associated with your application.
5. Income Stability
Every lender wants to minimize the chances of loan default. One of the ways lenders do this is by looking at the borrower’s income profile and job stability. Lenders extend their best loan offers to individuals with salaried jobs and stable incomes. This is the reason why individuals employed with reputed companies often find it easier to avail of low-interest home loans than individuals who are self-employed.
6. Location of the Property
The home loan rates one gets offered also depend on the quality of the collateral. Lenders sanction low housing loan interest rates on properties with high resale value. This is because the risk involved for the lender in such cases reduces substantially due to the presence of good collateral. Thus, properties located centrally, with modern amenities, often end up fetching lower home loan interest rates. Similarly, new properties help borrowers avail of low home loan rates compared to properties that are older and in poor condition.
7. Current Debt Obligation
Lenders also study a borrower’s current debt situation to understand their loan repayment capacity. In other words, borrowers who are already servicing several other loans and have the burden of several EMIs are seen as risky borrowers by lenders and, therefore, lenders do not sanction low home loan interest rate deals to such borrowers.
On the other hand, borrowers having fewer obligations find it easier to avail of low home loan interest rate deals.
Ideally, those wanting to avail of a housing loan must keep their FOIR or fixed income-to-obligation ratio under 50-80%. In other words, only 50-80% of their total income should be going towards covering the debt.
If you want a low home loan interest rate deal, make sure to use the knowledge provided in this article to your best advantage. If you are looking for a partner to be a part of your home loan journey, be sure to compare leading lenders in the market to avail of the most competitive deal and favourable borrowing terms.
