What is the Interest Rate on a Home Loan, and why so Important?

Interest rates play a crucial role when it comes to handling long term financial commitments like home loans. Any change in home loan interest rates influences both monthly installments and the overall financial planning of borrowers. While the reduction in these rates decreases monthly outgo, making it easier to manage the repayments, a slight increase can lead to unwanted expenses.

With the RBI keeping its repo rate fixed at 4%, the interest rates on home loans are now at an all-time low, presenting the perfect opportunity for intending borrowers to apply for the credits.

Nonetheless, before initiating an application, it is necessary for individuals to be aware of the different aspects related to these rates so that they can make the most of the current market situation.

A brief overview of interest rates

Since housing property investment is an expensive affair with additional costs like stamp duty, registration, etc. associated, you should have a reliable funding source to back yourself up. The secured nature of home loans allows borrowers to obtain a sizeable amount at reasonable interest rates.

However, to make them affordable, you need to have a clear understanding of the home loan interest rate regime offered by your lender. While many older loans are based on the MCLR regime, most financial institutions are offering RLLR-based loans these days. As per RBI’s current monetary policy, the repo rate has been kept unchanged (4%), making it more affordable for home loan borrowers.

For instance, a person opting for an RLLR-based home loan can expect a more transparent transmission of repo rate cuts. While RBI’s rate hike affects your loans and increases the interest rates, the lending rates reduce with the repo rate slash. Therefore, it is wise to apply for a home loan when this rate is comparatively lower.

Factors affecting your home loan interest rates

Apart from the interest type and regime, certain other factors also influence these rates, for instance -

· Your credit profile

After availing the home loan application, lenders generally conduct a background check about the borrower and assess the repayment track record, credit score, etc. CIBIL score represents a borrower’s creditworthiness, and maintaining a decent score is required to negotiate better interest rates with the lender.

If you are struggling to keep it between 750 and 900, better learn to improve your credit score to avoid loan rejections.

· Income stability

Not having a steady job and income stability can also influence the home interest charges, as lenders find it risky to sanction high-value loans to such borrowers. To avoid repayment defaults, financial institutions have set certain eligibility parameters. Borrowers meeting the income requirement can expect reasonable interest rates after submitting supporting documents.

· The loan amount and tenor

Since your primary goal is to make the monthly instalments affordable, you need to choose the loan amount and tenor wisely. To secure a better interest rate, choosing a shorter tenor is more convenient. Generally, financial institutions decide on the loan interest rates after checking the repayment schedule you have opted for.

Read Also: 5 Ways you can Get the Lowest Current Home Loan Interest Rates

Few financial institutions also provide pre-approved offers to home loan borrowers. These offers are available on numerous financial products, like home loans, loan against property, etc. You just need to submit your name and contact details to check your pre-approved offer.

· Property’s resale value

One of the home eligibility parameters also includes this particular aspect as lenders check the property’s location, condition, amenities, etc., before sanctioning the amount. Newer properties inevitably have a higher resale value in comparison to the older ones. In that case, not only you can expect lower interest rates for such properties but also avail a higher amount to finance their purchase.

However, make sure to check your repayment capacity before availing such big-ticket loans so that it does not affect other financial liabilities. Financial institutions keep housing loan EMI calculators available on their websites these days which helps to calculate your home loan eligibility in just a few clicks.

Apart from these factors, you can also find other ways to negotiate better home loan interest rates with your preferred lender. For instance, making part prepayments, choosing a lending institution you have established a good rapport with, etc., are some of the smart ways to avail reasonable interest rates.