How do financers fix interest rate on your home loan?
Home loans offered by various banks and financial institutions can be borrowed against a specific rate of interest. Home loan interest rates are never a single rate applied to every borrower. When you notice phrases like, “as low as 6.9% per annum” in home loan promotion campaigns, it means that it is the lowest interest rate offered. The actual home loan interest rate applicable for you is dependent on how the financer fixes your interest rate. While fixing interest rate on your home loan, the financers consider a great many factors. Do note that it differs from lender to lender.
- MCLR – Marginal Cost of Funds based Lending Rate (MCLR) is the reference point that banks use to decide interest rates. If the home loan you have decided upon comes with a fixed rate of interest, MCLR may not influence the home loan interest rate. MCLR is more influential on floating rate home loans.
- Types of interest selected – Before you apply for a home loan, get information regarding the three types of interest rates, namely floating, fixed and mixed interest rates. The fixed and mixed interest rate may come with higher risk exposure, because of the limited correlation with the market. But financers keep the type of interest rate as a basis while calculating home loan interest rates.
- Credit score – This is an influential factor when it comes to the approval of your home loan. If you have a credit score of 750 and more, you are weighed as an unfaltering borrower, and you have a higher chance of getting the loan at a lower interest rate. Make sure you get your credit report at least six months before applying for the loan so that you can work on improving your credit score.
- Loan amount – The loan amount is also important for banks and Housing Finance Companies in deciding the rate of interest. To save yourself from paying more in EMIs, you can try to pay a higher down payment.
- LTV ratio – Loan-to-value ratio is the percentage of the property value that the lender can lend you. It cannot be higher than the property’s actual value. Higher LTV means higher risk, therefore a generally higher rate of interest.
- Job profile – If you are a salaried employee, financers will charge a lower rate of interest than for self-employed professionals. Thus, if you are a PSU or government employee or work in a major private sector company, you may be offered a lower rate of interest as they might see it as a steady source of income.
- Tenure of the loan – You can get a lower rate of interest if the period of your loan is shorter, even if the EMIs are higher. With the online home loan EMI calculator, you can find the best tenure for your loan.
Home loan interest rates and EMIs are influenced by the aforementioned factors. Fortunately, most of these factors are within your control. So, you can actively work on improving your chances of getting favorable home loan interest rates.
About the Author:
Chetan Sharma is a professional digital marketer and blogger at heart. He owns multiple educational blogs like Selina Concise and many others.